One other question, doesn’t the return on investment depend on disparities between the buyer and seller? If you and I both bought similar homes 5 years ago for the same price, and now each are worth twice as much, then if you and I sell to each other, neither of us has received a return on investment, right?
I guess I’m still stuck on “where do you live after you retire or have no income?” Someone that paid off a house has a house. Someone that only rented for 45 years is homeless.
I really liked the mention of the intangibles of autonomy and ownership. As someone who has been limited to renting apartments units for the past 10 years, my income has finally allowed me to get into a small townhouse. It’s hard to express how deeply satisfying it is to finally be out from underneath the cold foot of corporate property management companies. They use faulty algorithms to inflate their rent until it hurts. Why should I pay 2x a mortgage for a 3b apt? Getting out of that system has made a huge difference on my mental health. So many of my neighbors like me were paying 35-50% monthly income just to cover rent. Not sustainable.
I made the choice to buy in 2021 and--like Brian below--benefitted from an incredibly low interest rate. That said, challenging the "cult" of homeownership is a good exercise. You might appreciate JL Collins take on this question too: https://jlcollinsnh.com/2023/03/02/why-your-house-is-a-terrible-investment/
I don't get it. How is it possible that renting and paying a mortgage come out to the same? Your landlord's gotta pay all the expenses that you would have to if you owned - and then some (management fees, higher interest rate for investment loan) - AND still make a profit. I know that my mortgage payment is a good couple-hundred/thousand dollars under what houses are going for rent in my neighborhood.
Good question! For many landlords, the rent they collect covers the expenses you mentioned plus the interest on the mortgage, but not necessarily the principal on their mortgage. They treat real estate like an investment: they are getting a "free" (interest-free) mortgage, by collecting enough rent to cover the interest--in exchange for the work they put in.
Of course, these numbers REALLY vary based on each neighborhood, and each individual home. There are some neighborhoods like you mentioned, and others where it's the opposite (where buying is more costly than renting).
Well, in all fairness, I bought before Covid and then refi'd during the historically low interest rates of 2021. I just ran the numbers based on the prices now and the going rent asks on Zillow, and the rents don't even cover the mortgage! Not sure why these guys are even doing it at all. Unless they're in it for appreciation? S&P seems much better for that. Which is exactly the point you are making here.
But then again, one could argue that it is worth it to buy, because the US is facing a major housing shortage and once rates come back down, prices will likely skyrocket. So better to get in now when the prices are relatively low, and then refi in a year or two when rates stabilize.
Thank you for posting this! I've been preaching this for a while. We live in an increasingly mobile society, so it's increasingly likely you won't be living in the same city 5 years from now.
The number includes dividends, which is safe to assume because most funds enable automatic reinvestment nowadays. The data comes from Robert Shiller at Yale, it's open-source, you just have to do an additional step in the spreadsheet to factor in the dividends.
One other question, doesn’t the return on investment depend on disparities between the buyer and seller? If you and I both bought similar homes 5 years ago for the same price, and now each are worth twice as much, then if you and I sell to each other, neither of us has received a return on investment, right?
I guess I’m still stuck on “where do you live after you retire or have no income?” Someone that paid off a house has a house. Someone that only rented for 45 years is homeless.
I really liked the mention of the intangibles of autonomy and ownership. As someone who has been limited to renting apartments units for the past 10 years, my income has finally allowed me to get into a small townhouse. It’s hard to express how deeply satisfying it is to finally be out from underneath the cold foot of corporate property management companies. They use faulty algorithms to inflate their rent until it hurts. Why should I pay 2x a mortgage for a 3b apt? Getting out of that system has made a huge difference on my mental health. So many of my neighbors like me were paying 35-50% monthly income just to cover rent. Not sustainable.
I made the choice to buy in 2021 and--like Brian below--benefitted from an incredibly low interest rate. That said, challenging the "cult" of homeownership is a good exercise. You might appreciate JL Collins take on this question too: https://jlcollinsnh.com/2023/03/02/why-your-house-is-a-terrible-investment/
I don't get it. How is it possible that renting and paying a mortgage come out to the same? Your landlord's gotta pay all the expenses that you would have to if you owned - and then some (management fees, higher interest rate for investment loan) - AND still make a profit. I know that my mortgage payment is a good couple-hundred/thousand dollars under what houses are going for rent in my neighborhood.
Good question! For many landlords, the rent they collect covers the expenses you mentioned plus the interest on the mortgage, but not necessarily the principal on their mortgage. They treat real estate like an investment: they are getting a "free" (interest-free) mortgage, by collecting enough rent to cover the interest--in exchange for the work they put in.
Of course, these numbers REALLY vary based on each neighborhood, and each individual home. There are some neighborhoods like you mentioned, and others where it's the opposite (where buying is more costly than renting).
Well, in all fairness, I bought before Covid and then refi'd during the historically low interest rates of 2021. I just ran the numbers based on the prices now and the going rent asks on Zillow, and the rents don't even cover the mortgage! Not sure why these guys are even doing it at all. Unless they're in it for appreciation? S&P seems much better for that. Which is exactly the point you are making here.
But then again, one could argue that it is worth it to buy, because the US is facing a major housing shortage and once rates come back down, prices will likely skyrocket. So better to get in now when the prices are relatively low, and then refi in a year or two when rates stabilize.
Just got around to reading, awesome post! Thanks for breaking it down in a way that is easy to understand
I would be very interested to see that spreadsheet you came up with
Thank you for posting this! I've been preaching this for a while. We live in an increasingly mobile society, so it's increasingly likely you won't be living in the same city 5 years from now.
Long term s&p is around 7%, so these numbers are off.
The number includes dividends, which is safe to assume because most funds enable automatic reinvestment nowadays. The data comes from Robert Shiller at Yale, it's open-source, you just have to do an additional step in the spreadsheet to factor in the dividends.