renting is ALWAYS financially more beneficial over time than owning

No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning. Let's make some financial assumptions that are borne out by decades of empirical evidence: 1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation. 2) The S&P 500 increases at a real rate of 8.0% per annum. These being true, it is ALWAYS better to... [more]

No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning. Let's make some financial assumptions that are borne out by decades of empirical evidence: 1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation. 2) The S&P 500 increases at a real rate of 8.0% per annum. These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch: Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%). An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31. Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month. A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750. If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year. If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of $39,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11. Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68. That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68. This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain. Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT. Do your own calcs, or criticize the model. I'm waiting.... evillager, you fell into my trap! 1) From January 1, 1950 through December 31, 2007, the average capital gains from the S&P 500 was 8.66%. http://www.moneychimp.com/features/market_cagr.htm That does not include reinvested dividends. "If you were to go all the way back to 1928 and dissect the S&P 500 into rolling twenty-year periods, there would be fifty-nine of them (1928-1947, 1929-1948, etc.). The average annual rate of return over those periods was approximately 12 percent." cdn.digitalcity.com/coaches/historic-market-returns-murray05262006.pdf That's where the 8% real return on the S&P 500 comes from, on a rolling average basis, which corrects for specifically-targeted dates. 2)0.7% real gain on real estate is from Robert Shiller of Case-Shiller fame: http://en.wikipedia.org/wiki/Housing_bubble "Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed. Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004." 3) Market rents are constrained by market factors: 40x monthly rent in income. Therefore, if incomes go up 0.7%, rents can at most go up 0.7% because constraints. "Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter)." http://en.wikipedia.org/wiki/Housing_bubble And that constraint on the demand side is 40x monthly rent in income, 28% total household income in housing expenses. 4) Historical averages do not equal future returns: that is true in the short-term. But it is also true that over long periods of time everything returns to its equilibrium. And the 12x annual rent = sale price is real, and constant over time specifically because of those market constraints: The 12x ratio (if that's what you're talking about) exists because of the ratio of prices to income. If you make $100,000, you can you can rent a property that cost you $2,500 ($100,000 / 40). You can buy a property that will cost you $2,333.33 in total cost ($100,000 * 28%). Let's just use rents vs. mortgages to make it easy. At 6% interest, you can afford a $400,000 mortgage, giving you payments of $2,389.20 You can afford annual rent of $30,000. $400,000 / $30,000 = 13.3. Very close to the 12x, right? And 6% is a very low interest rate and I greatly simplified the math. If you - like ccdevi - claim that the rent to purchasing price ratio is 18x annual rent, then making $100,000, being able to afford $30,000 a year in rent, you could afford a $540,000 house, but that would give you monthly mortgage payments of $3,237.57. Your monthly pay is $8,333.33, giving you monthly housing costs of 39% of your monthly income. OH WAIT! I FORGOT! NOBODY WILL LEND YOU THAT MUCH MONEY BECAUSE THE RATIO IS 28% TOTAL HOUSING COSTS TO INCOME! You say: "If the stock market and real estate go up the same annualized % over the long term (which I think is much more reasonable, especially for manhattan where they are so highly correllated)" If you the market prevents you from spending more than 40x annual rent / 28% percent of household income on housing expenses, HOW CAN RENTS / PRICES GROW AT 8% UNLESS INCOMES DO? Well, sweetheart, THEY CAN'T! "I'm not going to waste my time to go find the numbers for a pointless "discussion" with you, but I think this post of yours once and for all proves that your opinion is basically worthless." Because you can't. You're in over your head. You're blind to the fact that the market is constrained by 40x/28%, and that real income rise only 0.7% per year on average, and therefore housing prices can rise only that much. Your claim is so ridiculous that if you take the example of the $468,750 and increase it at a real rate of 8% per year, after 30 years it will be worth $4,716,870.42. But if your $100,000 income only rises a real 0.7% per year, it will be $123,277.58 after 30 years. WHO MAKING $123,277.58 CAN AFFORD A HOUSE WORTH $4,716,870.42? Them there's the numbers, baby, if you do what you are claiming. wyndcliff, ignoring the rest of them, I'm trying to show that the people who are so "into" real estate don't even know the fundamentals of the market. Yes I would like to buy, but for emotional reasons, not as an "investment," because it's a crappy one from a financial perspective. From having a secure place to live it's a marvelous thing to have. My numbers are all proved over DECADES. I remember the dot.com bubble - the "New Economy" is special. Well that's what the real estate bubble is all about. "Take 100 people who have lived in NY City for the past 10 years and have been property owners. Take another pople who have lived in NY City for the past 10 years and have been renters. Same income, same martial status. Steve, I am willing to bet you $10,000 that the hoome owners net worth is not only greater than the renters but significantly greater if not exponentially greater." That's exactly the danger! Extrapolating from the most significant increase in property values in the history of the world - the last 10 years in Manhattan - onward toward the future. You need to take much longer periods, and moving averages, and look at the market constraints. All my numbers are real and provable. Claims like property prices rise at a real rate of 8% per year - which is what evillager is betting his future on - are not only historically inaccurate, but theoretically impossible given the market constraints. [less]