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....
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Response by printer
about 15 years ago
Posts: 1219
Member since: Jan 2008
even taking your assumptions at face value, and ignoring the tax implications as you do, one critical error, or assumption, is that you are assuming inflation is zero for 30yrs.
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Response by marco_m
about 15 years ago
Posts: 2481
Member since: Dec 2008
please steeteasy, delete this clown exbreezy
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Response by sjtmd
about 15 years ago
Posts: 670
Member since: May 2009
From 1950-2009, the S & P 500 had an annual average return of 10.8 % ( 7.2% - price change, 3.6% - dividend rate). The average annual inflation rate over that time period was 3.8% . Adjusting for inflation, the total return per annum during this time period was 7.0% - close to 8 % as exbreezy states. Still calling for deletion??
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Response by Riversider
about 15 years ago
Posts: 13572
Member since: Apr 2009
I rented for close to 4 years. The anniversary year I saw a 7.14% increase, the second 6.666 and was told if I renewed I would face a 10% increase and would have to agree at the end of the lease to either purchase my unit or vacate. Upon making the decision to move, I had an arrangement that had lower after tax costs, brand new appliances, more and better amenities and equity that built as I paid my mortgage.
And while I've heard stories to the contrary from other people, my experience was that owners are treated better than renters. The building managers and managing agents understand the relationship to be different than dealing with a true renter in a rental building.
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Response by downtownsnob
about 15 years ago
Posts: 171
Member since: Nov 2008
1. your growth rates are wrong. I guarantee Manhattan rents will outpace inflation over the next 30 yrs as they have done for the last 30 years.
2. you've ignored the tax implications of deducting interest which is HUGE.
3. Finally you've ignored the fact that buyers are essentially pre-paying rent at today's prices. That is they won't be paying $10,000/month for a 500 sq ft studio when they are 70 years old like a perma-renter
will be. They'll be living rent free at that time.
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Response by downtownsnob
about 15 years ago
Posts: 171
Member since: Nov 2008
Your mortgage rate is wrong too. Mortgage rates are currently sub 5%, especially on $375,000.
You must own your primary residence so that you can retire in peace.
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Response by Riversider
about 15 years ago
Posts: 13572
Member since: Apr 2009
I agree with downtownsnob. The next ten years are more likely to see hgher growth in rent inflation than in previous years, simply by virtue of more people deciding to rent vs buy at the margin. The only thing to derail that would be a sharp drop in the Manhattan employmnet picture.
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Response by printer
about 15 years ago
Posts: 1219
Member since: Jan 2008
sjtmd - you understand the significant difference in this exercise between 10.8 nominal with 3.8 inflation, and 7 nominal with 0 inflation? it will drastically change his results.
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Response by marco_m
about 15 years ago
Posts: 2481
Member since: Dec 2008
am I the only one that remembers this clown posts the same thing evry couple weeks ?
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Response by bob420
about 15 years ago
Posts: 581
Member since: Apr 2009
copy and paste. I believe it isn't even original work.
Snob - I have serious issues with the OP assumptions. But you too are making some. NY over the last 30 years has changed DRAMATICALLY in so many ways. So any given apartment is in a much better place than it was back then (even after you back out inflation and compare pricing in real $'s. Just watch films of the late '70s to '80 to see how much things have changed. Anyone remember "The Warriors"? "Fort Apache, The Bronx"?
While the OP can't use his assumptions to support his assertions, neither can you.
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Response by Riversider
about 15 years ago
Posts: 13572
Member since: Apr 2009
Panic in Needle Park
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Response by alanhart
about 15 years ago
Posts: 12397
Member since: Feb 2007
AvUWS, are you saying NY has nowhere to go but down? Or is more like ...
Excelsior!
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Response by Wbottom
about 15 years ago
Posts: 2142
Member since: May 2010
always a pleasure, falco
very funny
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Response by falcogold1
about 15 years ago
Posts: 4159
Member since: Sep 2008
excelsior!!!
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Response by urnfna
about 15 years ago
Posts: 174
Member since: Jul 2008
This is the longer equivalent to saying gold is the same as tulips. Either one is moronic.
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Response by falcogold1
about 15 years ago
Posts: 4159
Member since: Sep 2008
Not just a word or even a cry to unification...it is a state of mind. On ward and up ward....
By now or be priced out forever.
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Response by AvUWS
about 15 years ago
Posts: 839
Member since: Mar 2008
Not saying no where to go but down. But it is unlikely, particularly in this environment, to have the next 30 years show the same progress for the next 30 years. We will be lucky if we can keep the next ten at the same place the last 10 took us.
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Response by AvUWS
about 15 years ago
Posts: 839
Member since: Mar 2008
sorry, meant to say "have the next 30 years show the same progress as the LAST 30 years".
now the city's deficit will "shrink" from $3.3 billion to $2.4 billion.
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Response by NYCMatt
about 15 years ago
Posts: 7523
Member since: May 2009
And yet another rent vs. buy "calculator" that conveniently leaves out the interest tax deduction.
*sigh*
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Response by AvUWS
about 15 years ago
Posts: 839
Member since: Mar 2008
Soon it will behoove someone to do the calculation both with and without the Mortgage interest deduction. Who knows if it will go away, get means tested, or be phased out.
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Response by downtownsnob
about 15 years ago
Posts: 171
Member since: Nov 2008
AvUWS: Do you really think rents in Manhattan will increase 2.5%/yr over the next 10 years? Especially considering you're starting at a low base from the 2008-09 declines.
Rental inflation is already higher than that. There was an article in the times discussing disappearing rental incentives in 2010 in new developments on the far west side. this equates to more than a 2.5% rent hike.
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Response by Topper
about 15 years ago
Posts: 1335
Member since: May 2008
The added uncertainty as regards the deductability of mortgage interest rate is a good reason to hold off buying for now...which could put additional downward pressure on housing prices. Seems to me that a home would be worth a fair amount less if the mortgage interest was not deductible.
Will be interesting to see what the Streeteasy October price change is. I expect a decline of just over 1% for the month (m/m).
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Response by AvUWS
about 15 years ago
Posts: 839
Member since: Mar 2008
Rental incentives just don't count in my book. If you included them then rents went down 15-20% last year when it wasn't a problem to find "no fee" apartments with 1 free month, or multiple free months, and that was often on top of some decreases in asking rents. The incentives were there to keep the asks from dropping too far. And they disappear when you resign your lease.
So I didn't count them as decreases then and I don't count them as increases today. If one were to count them I think rents are still down significantly from 2008 levels, which means it will take a few years just to get back to 0.
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Response by downtownsnob
about 15 years ago
Posts: 171
Member since: Nov 2008
AvUWS, your statement about getting back to 0 makes no sense. A rent/buy decision is from today forward, not from 2008.
Topper, mortgage int deduction is going no where. You're talking about a country than can't even raise estate taxes or tax rates on high earners. What makes u think a deduction that actually benefits the middle class is going anywhere??
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Response by sallyandbaby
about 15 years ago
Posts: 8
Member since: Nov 2008
What happens to buying if and when the government eliminates mortgage deduction in order to help with the deficit? Personally, I don't that will happen to middle America, just the "rich people who make more than $250,000 annually"...that could have a huge impact on the Manhattan market.
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Response by AvUWS
about 15 years ago
Posts: 839
Member since: Mar 2008
I make no sense? Of course it means something. It means something to a landlord. It means something to someone who wants to measure where they were and where they are going. Seems to me YOU were that someone and all I had done was respond to your assertion that they would only keep moving up like they had in the last 30 years.
But it doesn't make sense to discuss a topic with someone who can't remember what they had said two exchanges ago.
even taking your assumptions at face value, and ignoring the tax implications as you do, one critical error, or assumption, is that you are assuming inflation is zero for 30yrs.
please steeteasy, delete this clown exbreezy
From 1950-2009, the S & P 500 had an annual average return of 10.8 % ( 7.2% - price change, 3.6% - dividend rate). The average annual inflation rate over that time period was 3.8% . Adjusting for inflation, the total return per annum during this time period was 7.0% - close to 8 % as exbreezy states. Still calling for deletion??
I rented for close to 4 years. The anniversary year I saw a 7.14% increase, the second 6.666 and was told if I renewed I would face a 10% increase and would have to agree at the end of the lease to either purchase my unit or vacate. Upon making the decision to move, I had an arrangement that had lower after tax costs, brand new appliances, more and better amenities and equity that built as I paid my mortgage.
And while I've heard stories to the contrary from other people, my experience was that owners are treated better than renters. The building managers and managing agents understand the relationship to be different than dealing with a true renter in a rental building.
1. your growth rates are wrong. I guarantee Manhattan rents will outpace inflation over the next 30 yrs as they have done for the last 30 years.
2. you've ignored the tax implications of deducting interest which is HUGE.
3. Finally you've ignored the fact that buyers are essentially pre-paying rent at today's prices. That is they won't be paying $10,000/month for a 500 sq ft studio when they are 70 years old like a perma-renter
will be. They'll be living rent free at that time.
Your mortgage rate is wrong too. Mortgage rates are currently sub 5%, especially on $375,000.
You must own your primary residence so that you can retire in peace.
I agree with downtownsnob. The next ten years are more likely to see hgher growth in rent inflation than in previous years, simply by virtue of more people deciding to rent vs buy at the margin. The only thing to derail that would be a sharp drop in the Manhattan employmnet picture.
sjtmd - you understand the significant difference in this exercise between 10.8 nominal with 3.8 inflation, and 7 nominal with 0 inflation? it will drastically change his results.
am I the only one that remembers this clown posts the same thing evry couple weeks ?
copy and paste. I believe it isn't even original work.
Are we talking about RE or sexual relations?
Wait...same answer
rent
Another delicious serving of copypasta!
http://knowyourmeme.com/memes/copypasta
Snob - I have serious issues with the OP assumptions. But you too are making some. NY over the last 30 years has changed DRAMATICALLY in so many ways. So any given apartment is in a much better place than it was back then (even after you back out inflation and compare pricing in real $'s. Just watch films of the late '70s to '80 to see how much things have changed. Anyone remember "The Warriors"? "Fort Apache, The Bronx"?
While the OP can't use his assumptions to support his assertions, neither can you.
Panic in Needle Park
AvUWS, are you saying NY has nowhere to go but down? Or is more like ...
Excelsior!
always a pleasure, falco
very funny
excelsior!!!
This is the longer equivalent to saying gold is the same as tulips. Either one is moronic.
Not just a word or even a cry to unification...it is a state of mind. On ward and up ward....
By now or be priced out forever.
Not saying no where to go but down. But it is unlikely, particularly in this environment, to have the next 30 years show the same progress for the next 30 years. We will be lucky if we can keep the next ten at the same place the last 10 took us.
sorry, meant to say "have the next 30 years show the same progress as the LAST 30 years".
EXCELSIOR! goddammmit... EXCELSIOR.
http://online.wsj.com/article/AP4caa5d06aca646ef95ef5f19e2174c85.html
now the city's deficit will "shrink" from $3.3 billion to $2.4 billion.
And yet another rent vs. buy "calculator" that conveniently leaves out the interest tax deduction.
*sigh*
Soon it will behoove someone to do the calculation both with and without the Mortgage interest deduction. Who knows if it will go away, get means tested, or be phased out.
AvUWS: Do you really think rents in Manhattan will increase 2.5%/yr over the next 10 years? Especially considering you're starting at a low base from the 2008-09 declines.
Rental inflation is already higher than that. There was an article in the times discussing disappearing rental incentives in 2010 in new developments on the far west side. this equates to more than a 2.5% rent hike.
The added uncertainty as regards the deductability of mortgage interest rate is a good reason to hold off buying for now...which could put additional downward pressure on housing prices. Seems to me that a home would be worth a fair amount less if the mortgage interest was not deductible.
Will be interesting to see what the Streeteasy October price change is. I expect a decline of just over 1% for the month (m/m).
Rental incentives just don't count in my book. If you included them then rents went down 15-20% last year when it wasn't a problem to find "no fee" apartments with 1 free month, or multiple free months, and that was often on top of some decreases in asking rents. The incentives were there to keep the asks from dropping too far. And they disappear when you resign your lease.
So I didn't count them as decreases then and I don't count them as increases today. If one were to count them I think rents are still down significantly from 2008 levels, which means it will take a few years just to get back to 0.
AvUWS, your statement about getting back to 0 makes no sense. A rent/buy decision is from today forward, not from 2008.
Topper, mortgage int deduction is going no where. You're talking about a country than can't even raise estate taxes or tax rates on high earners. What makes u think a deduction that actually benefits the middle class is going anywhere??
What happens to buying if and when the government eliminates mortgage deduction in order to help with the deficit? Personally, I don't that will happen to middle America, just the "rich people who make more than $250,000 annually"...that could have a huge impact on the Manhattan market.
I make no sense? Of course it means something. It means something to a landlord. It means something to someone who wants to measure where they were and where they are going. Seems to me YOU were that someone and all I had done was respond to your assertion that they would only keep moving up like they had in the last 30 years.
But it doesn't make sense to discuss a topic with someone who can't remember what they had said two exchanges ago.