Though he’s a millionaire, Mr. Sethi has rented for the last 20 years in cities like San Francisco, New York and Los Angeles. When he lived in Manhattan, he calculated that it would have cost him 2.2 times more per month to own than to rent. He emphasizes that your calculations have to include the phantom costs of mortgage interest, taxes and maintenance, which is often estimated at 1 to 3 percent of a home’s value. So he rented and focused on investing....
“This is very much my life,” said Berna Anat, who lives in the San Francisco Bay Area. “I don’t see home owning in my future.” When someone says she’s throwing away money on renting, she thinks of friends who have homes. “They’re like, ‘Oh, we can’t go on vacation for two years, because termites have eaten the foundation of our bathroom,’ or like, ‘Yeah, we actually can’t hang out this weekend because we are on our hands and knees tiling the grout of our decrepit sunroom,’” she said. “Forever renting is very much a movement. It’s a lifestyle.”...
There's a whole emotional level to this that the article barely touches. The combination of finance and housing is different for different people. For example, I hate fretting over details of finance and want things set up to minimize the need to pay attention to that. But I also dislike having to worry about repairing and maintaining and renovating the house. I've lived in the same house for almost 40 years, and it's a vague repository of wealth, not an account with numbers to fuss over. That said, I could see the pleasure in relief from home ownership. To me, it's less of a financial question than a matter of the enjoyment of life. And, by the way, I don't relate to people whose calculations have to do with going on more vacations. I want my day-to-day living conditions to be so good that going on vacations is a very minor consideration.
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53 comments:
Why doesn't she just live in a fancy hotel like those rich people in movies from the 1930s?
IMO renting is the first thing you do in life, and then, nearly the last
I bought because I wanted to build a garden.
These people want you to own nothing and like it.
A renter will never be sovereign.
Renting is about being able to quit. Divorce your living arrangement whenever it gets too complicated or restrictive. No-fault home ownership.
Even if you own your home, that ownership is contingent on payment of taxes and other legal debts. You only own the set of rights the state permits you to own.
Properties decay. If you rent, just (sic) move out; you have no vested interest in maintaining the property. They aren't called slum lords for nothing.
Owning is hard. Because properties decay. But you have a vested interest (hopefully you weren't stupidly taking on a 100%+ mortgage) in maintaining the property and making it like a place you want to live. Owning gives you a greater sense of control over your life.
Back to the premise of this story: when you have a lot of money to spend on rent is far different from living paycheck to paycheck and renting. The reality is you can't just (there's that word again) move out to a better place. There are a lot of challenges and catch-22 situations which can make living impossible for the lower class renter.
Meade would not have redone your yard if it was a rental.
Owning a home does present some risks but as a renter, if you think you don't pay for maintenance and taxes, you are wrong.
“Meade would not have redone your yard if it was a rental.”
Depends on what you mean by redone.
Simultaneous commentgasm
Assuming you are going to be living in the same place for twenty years or more, then owning beats renting simply because the base rent doesn't go up and the rent is being paid to yourself and not to someone else. Interest, taxes, maintenance and repairs are part of the costs of ownership and the landlord includes that in the rent. Either way, you are paying these costs. On the other hand, if you are not planning to stay in one location for more than five years, then renting is probably the better option.
We almost bought a second, vacation home but in the end the thought of maintaining two homes stopped us. We ended up renting the vacation home. Have been doing that for several years and it has worked out well.
I've never thought of a house as a financial decision (though I recognize it has financial ramifications). I think of it as a place to live my life.
Renting is about being able to quit. Divorce your living arrangement whenever it gets too complicated or restrictive.
Not quite. You are usually somewhere into a lease of at least one year, which means you might have 10 or 11 months to go. I could sell my home and get to closing in 6-12 weeks.
Because of recent changes to the laws in Florida regarding cash reserves required of a COA, many residents are finding that they can't come up with, say, the $30,000 necessary to pay to the association. If this had occurred when I owned my condo (free and clear), I would have lost it. I always wanted to own, to follow (as others have mentioned) the path their parents did. Given the current state of affairs, my daughter and SIL will never be able to afford to buy a home.
Born in 1982, Ramit Sethi has lived a life that happens to be perfectly coterminous with a great bull market in stocks and financial assets.
I would note that renting in Manhattan (versus buying in Manhattan) makes a lot of sense, because you can effectively get the same thing by renting - an apartment, maybe a doorman, maybe an elevator.
Renting in the suburbs very often forces you to choose smaller housing with restrictions on what you can do with the house and yard - you really are not getting the same thing in the way that you are in the big city.
Ann Althouse said...
"Meade would not have redone your yard if it was a rental."
You do other things with your time and attention. When you rent you're often up on a high floor and there is no garden. But if you rent and have a yard, you might grow things that you could use as you go along — vegetables, flowers. You do what fits. Who's to say which is better?
What you need to look at is what kind of society you want to have.
Compare neighborhoods with high rental rates to neighborhoods with high ownership rates.
On a macro scale look at countries and history. The United States lifted the world out of poverty and it did it largely through the Homesteading movement.
There are many reasons for the results, but the results are obvious: I want a society with high ownership rates.
The main reason I bought my house was so I wouldn't have to put up with the landlord raising my rent 10% every year.
Homes are a better deal once the mortgage is paid.
if one buys with mortgage = renting another's capital = paying interest + returning borrowed capital
Bought a pleasant home in a good neighborhood over 20 years ago. Mortgage was $200K @ 8.25. With everything included, that cost me about $2.5K monthly. Could have rented it for about half that.
Re-fi after re-fi (including cash-outs for repairs and improvements-some major), the mortgage value is still about $200K, but the house is worth almost $1M. My rate is now 2.75 and monthly everything cost is a hair over $1K. I could rent it for $4-5K instantly. Not the worst scenario for an 81 year-old guy.
What if the neighborhood goes to crap (it hasn't)? Am I a prisoner here because of the cost of mortgage money today? No, I just rent this place and use that income to offset my new, higher ownership costs.
The costs that piss me off the most are the taxes. They're more on a million-dollar property than a quarter-million-dollar property. Ditto the bracket creep associated cost-of-living income increases. I know the cost of govt. has increased but, how many DEI departments, forgiven student loans and illegal resettlement costs are we expected to foot the bill for?
On the other hand, if you are not planning to stay in one location for more than five years, then renting is probably the better option.
May well be the case a lot of the time, but I would note that when I bought my first house, I put down about $53k, paid about $1200 per month for three years that would have gone to rent payments (so more or less a wash), then sold the house for $100k more than I paid. So I was up $47k on the house, a return of just under 100% (or 33% per year). Doubt I could have gotten that kind of return through investments.
"Homes are a better deal once the mortgage is paid."
Not having a monthly payment sure helps if you plan to retire and don't have a fancy pension that includes cost of living increases.
Re-tiling the Sunroom could be a rewarding activity. Depends on personal approach.
It also depends on where you choose to live. If you choose to buy in New York or San Francisco, you're going to pay extreme amounts and end up with a smallish home and very little property. Not to mention the 'amenities' you come across when you venture out of your home.
The premise has to start with 'where'. It makes a difference. If I were looking in SF today, I'd only consider renting. Here on the Gulf Coast of Florida, I would only own. If I was younger, and knew then what I know today, I would have bought at a much younger age. No question.
Meade, Ann- did either of you pull out a cigarette at 9:43 am?
Does America want to be Bedford Falls or Pottersville?
Wall Street and the Dems want Pottersville.
And nice work, NKP.
Owning a house is one of the few protections that the little guy has from inflation. It’s autopilot, between owning your home and social security, saving enough for retirement is not such a huge lift.
Achilles said...
These people want you to own nothing and like it.
A renter will never be sovereign.
+1.
Adding to that, a claim on physical property can be contested or even removed by government fiat but that requires physically removing the occupant (see the issues over squatters) at some point. It's much easier for the government to cancel your access to financial assets.
Buying into a progressive price environment is a bad value. Paying rent in the same liberal fiscal climate is a bad value. The government needs to curb their redistributive change policies and liberal fiscal orientation. Subsidizing blocs for votes is a myopic vision. Paying bennies for babies... our Posterity... is a myopic vision and a wicked solution.
"Simultaneous commentgasm!" No textual dysfunction here at Althouse, I guess.
Alluded to above but more explicitly stated: If you are renting, there is an owner. That owner does not intend to lose money. Thus your rent will include all the costs of ownership - Mortgage, maintenance, taxes, etc. Most people rent out property because they expect to gain from the arrangement. The renter will not gain in the arrangement. The advantage to renting is if you move frequently because the cost of sale is high, and you are at the mercy of market fluctuations. If you intend to stay for a while, buying is the way to go.
There's another advantage of owning. All of Berna's "friends" have an built-in excuse for not doing things with Berna.
The economic problem for renters is most of them won’t invest either or if they do they won’t invest in risk assets. Double trouble…
With renting you also miss out on any opportunity for an excess return above long term trend. I bought a small home for my parents just before covid hit. It is been more than a double since then. These types of gains are the exception but not unprecedented.
What’s the thing- blah blah blah is just showing up.
"If you are renting, there is an owner. That owner does not intend to lose money. Thus your rent will include all the costs of ownership - Mortgage, maintenance, taxes, etc."
The costs, yes, but not the headaches. I'm with Althouse, it depends on whether your interests in home ownership are purely financial, or not. I've always been surprised that 90% seem to look at it from a financial, rather than a lifestyle, POV.
I refuse to rent and be subject to the landlord watching me and my dogs and bitching about what I do. And I refuse to pay the owner a profit over cost of interest, taxes and maintenance. And your mortgage costs are reduced by inflation while rent goes up at the rate of inflation.
But yes, if you can consistently make 50% net in VC or hedge funds, then live in a rented shithole, eat ramen, and put every penny in the market. But consistently never happens. And if you have a family you are not going to make that choice for them.
Owner here. Most of my income is from rentals. When rents go up, so does my income, even with 8 units flooded out last fall. My partner owns our MT house, but I own the subdivision. I bought our AZ house 4 years ago, and at its peak, was up about a half a million dollars. Made about 20%, maybe more, in Las Vegas since I bought last July. On the flip side, her sister is living with her mother across town. They have had the house for maybe 50 years now. It was up in value for awhile, but is falling apart, in a deteriorating neighborhood.
I am lucky. My partner’s father was a real estate broker, and had been buying and selling houses from well before that. She has an instinct for what is going to appreciate, and what isn’t. One of the reasons that we bought our current house in Phoenix, is that it was the closest upscale new construction to the Mayo Clinic there. The value of the house jumped when the subdivision was finished up. A lot of luxury rentals, but few new houses. She’s probably made the bulk of her money as an adult in buying and selling real estate. Didn’t look good when she went on Social Security. But otherwise lucrative. Weird stuff, including a 100 acre farm/gravel pit in rural KY. Got a good price on it (and tried to live there) because the previous owner’s boy was caught growing pot under the tobacco plants. Somewhat typical was an older house in N Central PHX. Got a good price buying it, put $20k into it, with sweat labor, and doubled her money in 2 years.
Of course, there are downsides to ownership. I mentioned the 8 flooded units earlier. We have a lawsuit going against Kaiser for their inadequate retention pond that caused it. On the flip side, we had a tenant attacked in one of our units. A squatter had broken into one of our units nearby, and our management company didn’t find out quick enough. So we are the defendants there. All three of our homes have HOAs. MT HOA is cheap, and I still have enough votes to kinda ignore them. The PHX HOA is pretty draconian. New management, so are overly zealous. Got a letter a month ago about weeds. Weren’t really that noticeable, but pulled them anyway when I popped by. Last week, got another one for my bushes needing trimming. They probably do. Late winter/spring is growing season there. We had them well trimmed 3 months ago. Now they are a bit ragged. Other stuff like not parking on the streets, dogs on leashes, picking up their poop. They are repaving in a couple weeks, but still no fences to keep the coyotes out. The HOA here in Las Vegas is pretty draconian, and quite expensive. But for that, we get the 2nd fastest elevators in Las Vegas (after the Stratosphere), very good security, bellmen and valet parking. Security keeps the vagrants away, and minimizes the prostitution. And for the first time in my 25 years (come August) together, my partner fees secure enough to come out of her shell. Probably the most popular person here.
I keep seeing these articles pop up, but they always talk about people who can afford to invest a lot of money after they have already covered their living expenses. (Plus, the stock market has been on fire during the last 15 years.)
Living expenses are a cost that you will have to pay no matter what, so if you don't have the extra money to invest, it makes more sense to buy a house and build equity.
Also, a house is a very long term investment. You have to plan on being there for decades.
I had a friend who bought a house. When it's value went up in a couple of years, he sold it and bought a bigger one. Then when that one's value went up a few years later, he sold it and bought a bigger one. Then the housing market crashed in 2007 and he was massively underwater with his loan. So he just walked away from his mortgage (which he could have afforded to still pay) and let the house be foreclosed on. If he had just stayed put and kept paying the mortgage, he's be in a good place now. But now he has no house and he blames that on the "greedy businessmen" who crashed the housing market.
Moving to a new residence is not like checking in and out of a hotel. My wife and I have lived in our home since December 2003. We have accumulated a lot of stuff. Finding a new home and moving would be a monumental project. Not just packing a few suitcases and throwing a few pieces of furniture in a U-Haul. We would need to pay packers and movers. We considered down-sizing in Fall 2020, but ultimately decided against. If we bought or leased another home, our lease or monthly payment would be higher, even if we downsized considerably. There are also tax consequences when selling, even your primary (homestead) residence. Due to our age, about 75% of our property tax appraisal is frozen at 2012 levels. If we sell (or lose our homestead exemption by renting out our home), we lose this freeze. The appraisal on our existing property, if we kept it, and our new property would be at current market.
Seems moving/renting would be a bad plan for us. Can't imagine it would be much benefit except in unusual circumstances.
I think the benefit of owning is that it helps you with cashflow way down the line (i.e. in retirement), rather than that it's necessarily a store of value you anticipate accessing. Rent has increased dramatically over the past 20 years (or 40, 60, etc.) along with the dramatic rise in underlying real estate prices, which means retirees who rented their entire working lives run a risk of getting priced out of the rental market once they're no longer working.
Sure you can sustain $3000/month right now, but suppose you weren't working anymore? $3,000 a month requires something on the order of $900,000 in invested assets alone (if you want to live off of proceeds, rather than depleting your fund net of inflation) and leaves you much more at risk in a future downturn, and at risk of rents rising faster than either inflation or your portfolio. In theory, sure, you can make much more taking what you gain/save by renting (however much that may be) and investing the proceeds, but you can also lose it all. The real estate ownership benefit -- to my mind -- isn't really about expected value of your investment, so much as it is about limiting your cashflow risk in the future.
That said, real estate also leaves you with downside risks like natural disasters, building collapse, rising crime and bad neighbours in general. So nothing's perfect. But people do need to place their bets when planning for the future, and houses makes sense to me.
Whether to rent or own is a circumstantial question. Will you be moving soon? Then rent, the ability to leave and get a new place is what you are looking for - flexibility. Will you be in the same place for twenty years? Buy. My nephew's apartment 2 bedroom is $1,200. My mortgage payment for 4 bedrooms 2 and 1/2 bath house is $1,100. I am responsible for all repairs and yardwork, but it is worth it for me to own.
We are grateful to own a small home with a low mortgage. We couldn't afford to rent in our community. Nor could we afford to buy a new home elsewhere. So we stay put.
My earlier personal example based on 20+ years in the same house (assuming stable neighborhood) is econ 101. There are, however, shorter term scenarios that work well. Maybe our former professor hostess can attest.
My son lived with 3 or 4 others while a student at UCLA. VERY nice condo in heart of Westwood. The parents of one of his rommies had bought the place in anticipation of good rental income for four or five years and then flipping it (or not) after graduation or grad/professional school. Not an unusal arrangement in that community. Kind of a "The rich get richer" thing but takes some of the bite out of college expense.
There is a point where it makes sense to rent.
When you have high Biden interest rates it's probably such a time.
But when rates are 'normal' you can own the home for the same monthly payment and build equity instead of buying the house for somebody else.
Renting is transient. In any of those cities, if you don’t own, you can’t plan a future there.
I have owned and I have rented. Financially, it made more sense to own in the long run. Selling a house for a move isn't all that difficult to do- it is the moving that is a pain in the ass.
I will probably buy again at some point in the future, but it will be much smaller and even more out in the boondocks than where I owned in CT. My ideal would be a nice lake home in the middle of nowhere.
Posted on bogleheads.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=432162&newpost=7875950&view=unread#unread
Mr. Sethi says "your calculations have to include the phantom costs of mortgage interest, taxes and maintenance . . ."
How are these costs "phantom" in any sense? Add homeowner insurance, and you have pretty much ALL the costs of home ownership in that list. Makes me wonder why anyone would pay much attention to this guy, spouting that sort of nonsense.
in NYC, I'd rent.
In Oklahoma, I'd buy a house.
So it depends where you live.
'In Oklahoma, I'd buy a house.'
In Oklahoma, I'd buy ten...
Bravo! And that's been my style for 3 years now since my divorce.
I always preferred owning to renting. First, my mortgage payment never goes up (much). Also, I have much more room for the same amount I paid in rent. Plus, I’ll make a nice profit when I sell.
And it’s hard to put a price on not having really annoying neighbors in the same building. In my experience, homeowners tend to make better neighbors than renters do.
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