General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer.
Say a potential buyer has a mountain of cash. They can scoop up a property with no issue. Financially, owning makes sense to them (no interest payments due to a mortgage), especially if they pick location correctly and see a property value increase.
Next, say a potential buyer has a small pile of cash. A mortgage will almost certainly be needed to finance property, though this buyer should be able to cover the down payment. If location is right, it should work out well for this person, but it will take decades to see a positive return.
Finally, say a potential buyer has little-to-no cash, living month-to-month on rent. They simply cannot afford to purchase a property and/or get approved for a mortgage.
Let's consider each of these three categories of buyer in your scenario, where a local government makes it more difficult to seek rent. The wealthy buyer doesn't care, unless they own many rental properties, in which case they'll possibly have a harder time filling their units. The second buyer will benefit the most, potentially allowing more of this class to purchase properties (theoretically, more properties will be on the market). However, the third buyer is out-of-luck because they simply don't have the financial resources to outright purchase a property. Decrease the number of rental properties, and rents will increase, unless the number of new buyers balances existing renters.
In summary, in your scenario, I would bet the wealthy will sell some properties and cash out, while the middle class will scoop up more properties and be able to pay for higher rents. The poorest, however, will likely need to settle for a lower overall standard of living.
Just to note - that last class of buyer has no financial motivation to remain a renter. They are stuck in a situation they can't get out of easily where a larger portion of their paycheck goes to housing and decreases the rate at which they accrue value.
This is why home buying assistance exists and is a very very good program for the government to subsidize, renting should, ideally, be a tool for those just starting life and those with the means to indulge in luxury - most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration, but the majority of renters today are people who are stuck in the rent cycle or don't know any better.
> most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration
I'd be very curious to know what kind of exceptions you mean.
I've owned where I live a few times, each time it ended poorly. Now, I rent. The problem is, I can't buy what I want to live in even if I wanted to buy. Here's what I want to buy:
- Inside the city limits of Seattle; location is not fungible, I can't substitute a property in Spokane or Atlanta for one in Seattle.
- Within a 10-minute walk to a train station or rapid bus route.
- An outdoor space of my own, not a shared garden but a balcony or private garden of some sort.
That's it. That's the Tweet.
You'd think that would be trivially easy, but the exactly two places I've seen where property can be owned (one is a townhouse development in Rainier Valley with an astoundingly expensive HOA, yet still sold out and the other is a condominium development near the stadiums but the handful of units with a balcony sold out immediately) are unavailable.
There's nowhere else. No condos, no townhouses, no rowhouses, not even any detached houses. It's all rented apartments. No one is building ownable properties, because of a combination of striving for rental returns, zoning, and Washington's condo liability law.
Well yea - that's a poor market for ownership and Seattle has one due to the recent (in terms of housing price response) appearance of two insanely large tech giants in the area - that causes a lot of market distortion that you're sadly on the receiving end of today.
It is financially advantageous to own a property, it is usually financially advantageous to own a property if you purely want to rent it out - renting is a profitable business that's why there are a lot of really large companies holding insane amounts of property in the US. If the city/region has some guaranteed demand for rental numbers (like uni stundents and young people working their first job) then the math changes to make it even more advantageous to rent - what you're essentially seeing is that owning property is the correct decision, it's so correct that the market for property is being soaked up by landlords that can make a tidy profit on the margin and are more reliable load recipients than individuals.
I'm sorry you're in the housing situation you're in because it sucks but, if you did see two identical places you liked and one was available for sale and the other for rent then it'd be the correct financial decision (really correct in fact) to buy the property.
Various regions within the US have toyed with ideas around taxing property ownership for investment more heavily but there is a lot of lobbying money pushing back on that. A lot of places (including BC where I'm at) actually have a primary residence tax credit for owners - if you own your property and use it as your primary residence you get a bit off your taxes to help swing the balance back toward individual owners.
Depends on opportunity cost. You might consider reaching out to trusted family for short-term financial assistance (loan interest is the problem, not the loan itself). You may be able to get a bank loan to cover the down payment, but is that worth it?
Depending on the real estate market and your specific property, a monthly mortgage payment has a good chance at being lower than comparable monthly rental payments. Bear in mind: every dollar paid for rental is burned, whereas every dollar paid to a mortgage has at least some potential to be recovered in the future. And think a few years out: say you pay $800/month for rent. Over three years, that adds up to $28,800. If you live in a hot area, your rent will likely increase, so you'll pay more in the long run. A mortgage payment, however, will not, and you might get that $28,800 back through renting it and/or selling.
I see renting vs ownership as "XaaS" vs in-house. Renting is essentially Housing as a Service. There's a use case for XaaS, but at a certain point, owning critical infrastructure just makes sense.
I agree that buying is preferable to renting (and better for your finances). But you underestimate the difficulty of doing that if you are poor. There are many folks who do not have any family or friends who are well enough off to be able to part with the money for your down payment. And no, you cannot get a bank loan to cover the down. The down payment exists because the bank wants to be sure that you have some skin in the game. In fact, a big part of the process of getting a mortgage loan approved is the bank digging into your financial records to confirm that the down payment is really your money, not a loan (from a bank or even trusted family). If they are not convinced it's your money -- no loan for you!
I suspected a loan wouldn't work for the down payment, but I wasn't 100% sure. Thanks for clarifying.
Oh, I know it's very difficult for poorer people to buy property. Are you familiar with land contracts (also called contract-for-deed)? In certain scenarios, they provide a path to ownership for poorer people, but they're also offered in a predatory manner.
I'll add that a poorer person seeking to buy might consider moving out of a big city to a smaller town. Obviously, this approach isn't for everyone. However, if home ownership is that important, you can find nice homes for sub-$150k in many smaller towns. At that price, a 30-year mortgage is under <$1000 a month. Considering how much a two- or three-bedroom apartment may cost in a big city, financially, it works out.
> "General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer."
This is a valid rule of thumb only because transaction costs are generally much higher when buying a home than when renting. Typically 6% of the cost is siphoned off by brokers (3% to each side) and the fees people pay to take out a mortgage loan are significant. Fees you pay to start a lease generally amount to only a small fraction of these.
It's also valid because the real-returns of investments typically exceed the gains on housing[1] and you tie up a minimum of 20% of the value of your home when you buy.
1: This gets complicated because (at least in the US) most people don't leverage their investments at a 5:1 ratio, but do leverage their home value by that much.
> real-returns of investments typically exceed the gains on housing[1]
In markets where people want to live. Owning a couple acres around the far-flung suburbs of Seattle or DC will net you some good money.
No one is buying housing in Gary, Indiana. Floods have annihilated many towns around the Mississippi River, and there is plenty of real estate in Detroit and New Orleans that sure as hell ain't gonna exceed the S&P 500 anytime soon.
I think you read my comment backwards? I was trying to say that you get more reliable returns if you invest your down payment in a diversified fund than if you use it to purchase a house.
As far as "markets where people want to live" goes: yes, in any market, you can outperform the average if you can predict the future better than other investors. Some of the places around the Mississippi River probably used to be considered good investments; now they aren't. If this whole full-time remote thing catches on, it's possible that the bay-area will drop in prices. It's also possible that only part-time remote catches on, and interviews resume in person so people want to stay in the Bay Area. Heck, it's unlikely, but possible, that Cupertino or Saratoga decides to rezone large swaths of the town for more density and the increase in supply drops prices.
A good rule of thumb for selling costs is around 10% of the selling price. And when buying, factor it around 3% just for closing costs (or more if you're paying points), but then add-in more for funding reserves.
You should only ever rent if you intend to live in a property an amount of time so small that the rent you're paying out doesn't cover the exchange cost. And that assumes that property prices aren't increasing which they almost always are and generally at a pretty firm pace.
Basically - you're trying to avoid the scenario where you live in a place so short that the exchange cost you pay to flip it on the far side exceeds the amount of rent you'd pay to reside in it.
Determining the exchange cost isn't always straight forward - the 6% given above may or may not be realistic for you, there are some brokers that will take a 1% cut and those folks are more common in hot markets, and there may also be taxes you need to take into consideration.
Also, there is a risk of getting stuck with a lemon - if you purchase a house which seems fine but actually has extensive water damage and mold you could lose a portion of the value, this is a really significant consideration in quiet housing markets (like the midwest) and less important in areas like SF where most of the property's value is likely the land itself - in either case you're taking a big chunk of the value of the structure out of the equation when reselling the property but in the later case the value of the structure is rather minimal while in the former case the land is essentially free.
Basically you almost always want to buy if you are able to. The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord.
> The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord
In principle, the principal payments are doing that (interest payments are being siphoned off by a bank, instead of a landlord), as is any delta in the property value (but if that's negative, that's anti-equity).
I'm in LA and it's not extremely uncommon. I'm also seeing it in a few other Southern California areas.
Also there are tons of options to flip if you want to put in some work and have the funds. Not that hard when the price per square foot grossly exceeds the cost to build.
Or just put those 100k into a margin trading account with 1:10 leverage in a "west coast real estate index". No commissions, no agents, no property taxes, no leaking roofs.
Regular people do not get 1:10 leverage in a margin account. Furthermore if you lever yourself up to 10x with options or exotic ETFs or whatever, and the market goes down by 10%, you don't have any money left. If you put 10% down on a house and the value goes down by 10%, you still have a house to live in even if you don't have any equity. You can choose to just sit and wait for the market to recover. There's no recovery from getting margin-called on your 10x leveraged account.
Still doesn't offer that tax advantage (either in capital gains or the numerous deductions). And if you have to live somewhere like the parent comment, this doesn't help you.
You will have a commission in the expense ratio indefinitely.
But yes, definitely a decent option if you want to put your money in real estate with less headache.
The tax advantage is up to comical 250k that will be promptly eaten away by brokerage fees, transfer fees and other god knows what fees, on top of all the house maintanence costs over those years.
Those who have a million or two but a house not because it's good for financials, but because they can't stand cranny rentals. Those with bare minimum money jump into a mortgage because for them it's the only efficient financial instrument available (a margin trading account essentially). If they tried to open such an account with a brokerage, they would be told no after looking at their net worth.
I'd rather pay capital gains tax on a 250k stock appreciation, than have my house appreciate by the same amount. It's just ordinary people don't have brokerage accounts that can appreciate by so much.
As a slight diversion, this thread danced around a pretty interesting point in my eyes - why are ordinary people denied access to brokerage accounts with advantageous rates - it's not likely that the money actions will be nearly as dynamic or require nearly as much oversight as folks with a lot of money and the minimum investment bars seem unreasonably high before you start dodging the heavy fees. Isn't that system just furthering wealth inequality?
If it's just about money then you should diversify - but owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you - with the exception of going underwater on your property value which is only ever actually a problem since banks can effectively margin-call their mortgaged properties.
> owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you
lol what? Trees fall on houses all the time. Pipes break and water damage can seriously impact structure & foundation. Dumb-ass kids accidently drive their mom's car through the veranda. Houses burn down and kill people. A factory shuts down and now there are no more jobs so everyone leaves, driving your house price down.
Assuming a home is a secure investment -- even in a hot market like SF or DC -- is foolish.
> More than one-quarter (27%) of reported fires in 2014-2018 occurred in homes. Even worse, more than three-quarters (77%) of civilian fire deaths and almost three-quarters (73%) of all reported injuries were caused by home fires.
> During this five-year period, US fire departments responded to an estimated average of 353,100 home structure fires per year. These fires caused an annual average of 2,620 civilian deaths; 11,030 civilian fire injuries; and $7.2 billion in direct property damage.
No, because if you're investing on a 1-5 margin, the market dropping by 20% in two weeks, and then going up by 80% over the next five will leave you flat out broke.
Meanwhile, someone not investing on margin will be up 60%.
Only if there were margin calls on real estate loans (there aren’t) of if there were no margin calls or forced selling on brokerage accounts (there are) this would be good advice.
There are margin calls on real estate loans - they aren't nearly as capricious but when mortgages are renegotiated banks will usually refuse to offer a new mortgage if the property is underwater - in that case the bank will generally try to foreclose on the property and recoup the lost mortgage balance through debt collection. This happened all over the place in 2006 and led to the housing bubble.
If you can afford a 20% or so downpayment (big if, I know), the two options might work out to fairly comparable (after-tax) monthly payments right now. In the longer run, buying will leave you potentially with equity and with a fixed rate mortgage will assure fixed payments.
Even in a mildly inflationary economy, making fixed nominal payments on a salary rising more in line with inflation for an asset valued more in line line with inflation can be a fairly attractive deal.
But none of the above is meant to be investment advice. Homeownership has its risks and certainly loses flexibility.
Just checked Redfin, a condo in SF for $1M with a 30 year mortgage at a nice 3% interest rate and 20% downpayment would be:
- $3300 in principal + interest
- $1000 property tax
- $500+ HOA
- $200 homeowners insurance
That is $5000+ monthly and requires $200k upfront (and significant upfront cost as the brokers are paid off). How is that comparable in after-tax payments to renting a $3000 apartment?
The math might be a bit different for SF - there are a lot of local factors to keep in mind (like that 500 HOA + Homeowners seems steep to me for a property that isn't near EOL) - but the biggest different at the end of the day is that the 3300 you're paying into principal + interest is still your money (well minus the interest) when you rent all 3000 you're paying is essentially throwing money into the void.
5-10 years later you have equity, a portion of value of the home not tied up by a mortgage. You can refinance or sell and extract this money. You can then use this money to move into the $2M house you had your eye on.
The difference is appreciation. Otherwise owning is probably 150% the cost of renting in SF. And with rent control you don’t have the issue of rent going up.
I've never owned a house in the US, but my understanding is that the interest portion is tax deductible (whereas rent is not), which at the kind of salaries necessary for this housing is likely to make a sizable dent in this payment.
I must admit that I had forgotten how high property taxes in the US can be, though. HOA surely depends a lot on what exactly you'd be buying.
Not only that, a 5% return on that down payment is a $833/month opportunity cost.
Owning in SF is generally more expensive than renting. Why? Because house prices have appreciation assumptions already priced in. Plenty of people lose money every month versus rent but appreciation more than covers it.
I faced that choice years ago, and chose to rent. It was a $500k mistake (over ~5 years). The condo was near Google, and it was a bit after 2008; your results will probably vary.
In a supply-limited housing market, landlords are competing with owner-occupiers for the same units, so you end up housing the same number of people either way. More investor money just means that purchase prices are higher, and rental supply is greater vs. owner-occupied. In that case, the government making it hard to be a landlord will be good for marginal home buyers, but bad for marginal renters.
In a market where housing development is less restricted and construction occurs to meet demand, the addition of more investor capital means that more houses will get built. This is a good thing! It means that renters who don’t have enough wealth to build a house still get a place to live. In that case, you want to make it easy to be a landlord to encourage more capital to be in the landlord business and building homes.
If you pull out investor money, prices drop, and new landlords will be able to charge lower rent at current returns.
I’m not convinced higher prices means more supply for housing. Building a house is labor intensive, and labor costs increase with housing costs. As stupid high as Bay Area housing prices are, new construction costs are even worse. It’s literally cheaper to build houses elsewhere and ship them in. However, in SF, at least, the construction worker unions are trying their best to block such projects: https://news.ycombinator.com/item?id=26526455
It doesn't always work that well in practice as investor demand can drive housing stock that is a poor match for housing demand. In theory this should all wash out in a free enough market, but no guarantee that won't take many decades - so it's not much help to people needing housing now.
The structure of investment vehicles for this makes a big difference in what is actually built too, and how the development companies are funded.
You have to flip that around. It has to be easier and dearer to own than rent. Seeking rents is already hard. If you follow all the rules and regulations it takes decades to profit when renting out homes. We need tax relief and incentives to build affordable housing...bad.
Yeah, but rent is covering that too, in addition to the equity. You've also got the inherent equity of the house itself being an appreciating asset.
Point is, when renting out an appropriating asset for the same as the monthly payments on your loan, defining "making a profit" as "completely paid off my loans on the appreciating asset that I can sell at any time" is a bit disingenuous.
Let's say you do eek out some amount that could be called profit. You get taxed on it according to your highest rate bracket. Then you have maintenance costs. These can be substantial and come as a surprise. If you get good renters and they pay for ten years you might get to a point where the whole deal was worth your time. You can always skim a little but it's really a long term prospect. Maybe you get lucky and are building significant equity each month as well. I don't really count that. Maybe a tennant implodes and you are stuck with a huge repair bill for some fucked up reason. It is perilous and fraught with inconvenience...not easy money. Forgot to mention insurance.
Oh yeah, one of the towns where I have property just pulled a new rental regulation out of thin air requiring a notification filing and fee for each rental property per year or on each new tennant lease. This country is turning into regulation hell.
It sounds like you've never been a landlord. For small-timers at any rate, the main attraction is asset appreciation, and the second is tax subsidies. Excess rent is usually the least important factor, and is often around zero, and can even be negative.
My parents bought a house when I was a kid. They struggled through bad tenants but were able to stay afloat when rent was not coming in. Fast forward 30 years, the house is literally free money for my semi-retired mom. The house rent pays for taxes and repairs and gives my mum excess money for the month.
> You get taxed on it according to your highest rate bracket.
Why would you personally own the property as opposed to putting it under an LLC or Corp? You would still have to pay taxes on personal income but it offers a lot more options on how to recieve the income and handle expenses.
And you open up your personal assets to liabilities from the property. Not saying it’s not possible, the additional insurance costs usually even out that difference
In Australia people rarely expect to profit when renting out. It's all about negative gearing to offset your income tax and sell the property for a profit later and move up the ladder.
So on one hand you could say the renters get a good deal but in the long run the upward price pressure makes it tougher for everyone.
That's just messing up with the market. You need to make both easy, so that people who want to settle and buy can do that; and people who want to be mobile and rent can do that.
I think the issue is that in the US the pendulum has swung so far in favor of landlords that the government needs to adjust things just to realign it so that both buying and renting are easy. Both should be options - I absolutely agree - but buying is quite difficult right now and a lot of folks are forced into renting for financial reason. That's pretty bass ackwards - a lot of folks aren't paying extra to be mobile - they're paying extra to be static and the additional costs they're forking over are deferring the time when they'd be able to afford purchasing.
Many buildings where I live are explicitly rental buildings ... so I guess you would be meaning co ops and condos but they are surprisingly expensive conversions.
