How I Think About Rent vs Buy

It never made sense to rent (vs owning). In fact, I don't even get the fascination with this debate. Getting out is a big mistake, especially for those who think they can time the market and get back in at the "bottom".
When someone asks themselves how long they will be in the unit, I seriously doubt anyone knows. However, should you have to move, hold the property for rental and problem is solved.

Thanks Larry for the comment. I've had this discussion so many times and there are so many different trains of thought on it that its hard to argue when someone has a differing view.

In the late 80's ask homeowners who first bought if it would have been wise to rent for 4-5 years and then buy, and make interest income on their money during that time. When I was an equities trader and the indices neared their record highs in early 2000, every professional was saying "buy for long term, don't look at where we've come from" and that turned out to be a deadly mistake for so many.

Fact is, real estate has had an amazing unsustainable run, and for those like me who bought with a contrarian strategy of buying low, after Sept 11th, and selling high, 3 months ago, I just dont see how one can argue. Especially when my living expenses rose to the point that it was affecting my financial well being and we were struggling to make payments; seemed like a good time to sell and cash out.

I do intend to buy, but I'll wait for a few years and rent the cheapest 1BR of the bunch, and make $1400 a month in interest income. Not the most aggressive strategy but it allows me always make a move later.

"Fact is, real estate has had an amazing unsustainable run"

I see. There's the difference in opinion. I say it has been and is sustainable.
But, I don't understand how your "living expenses rose". Care to explain?

Property Taxes rose and I had a shortage spread on my loan. A shortage spread is when the lending bak underestimates the monthly taxes to be collected for escrow to be used for paying property taxes, or taxes rise and the set amount the bank has been collected was not enough. Hence, a shortage.

The shortage amount is divided by 12 and added to the new payments.

My property taxes started out at $520 or so a month after Sept 11th, probably due to taxes in 2001. But as values rose, so did my property taxes. I believe Bloomberg raised property taxes by like 21.5% over a 2 year period, and then by another 3% or so after that, starting in 2003.

My monthly payment jumped from $3350 to $4200 for a 12 month period until shortage spread was covered, and then dropped a bit to $3800 or so; but still a rise in living expenses.

In the recent NY Mag story, I recall the Q & A page with Nouriel Roubini, a professor of economics at Stern School of Business at NYU, as he said, "What has happened in the past four years is that the real price of my housing service has doubled. I'm paying more to live in that home."

Rising propery taxes is a big issue and led to the tax revolt in 1977 in California. But, with all due respect, they go up to reflect rising values, no?
btw, look at the time stamp of our posts! I had no idea that NYC was 8 hours ahead of Arizona....lol
I read Roubini and have been to his blog: http://www.rgemonitor.com/blog/roubini
He is brilliant, but not a good forecaster and has very little real world experience in real estate.

BTW, WHAT ARE YOU PAYING FOR RENT RIGHT NOW?

Noah, your analysis seems to be based on a 2-year buy and sell strategy. Would your conclusion be different if you were planning to stay somewhere for at least a few years?

Also, can you explain how you can get "interest income that equals almost 50% of .... rental costs"?

Just seems to make sense to buy a place if you're planning on staying for at least a few years. Even if you break even vs. renting, assuming property values escalate (which over time there's a greater chance they will), you're building equity.

Any thoughts?

Finally someone with some sense - People don't THINK about what it will cost them to buy a place - what kind of return one can make on the 20% down payment, how mainance and taxes can and do increase, how you have to pay 6-9% of the purchase price of your house to a broker and in flip taxes when you sell, how you have to pay "mansion taxes" and "mortgage recording taxes" when you buy. Prices likely will continue to fall in Manhattan. People seems obsessed with the notion that "buying is better than renting" - and "New York is different - prices can't fall here" - but in my humble opinion, looking at the economic reality of the rent v. buy situation, buying in this market just doesn't make any sense at all.

Thanks again Larry for input. My first readig of Roubini was in this NY Mag article, so thanks for the insight on his forecasting. I closed on my condo July 6th and I am with family on LI since, except for my wedding & honeymoon that I just got back from Europe for. Now I need to get back to NYC asap!

So, saved some $$$ past 3 months which helped with wedding expenses!!

Trent: It wasn't about him renting vs buying. It was his decision to exit the market that he was already in that I disagree with.
"but in my humble opinion, looking at the economic reality of the rent v. buy situation, buying in this market just doesn't make any sense at all"
I have heard that for 20+ years in every market that I bought before buying.
Heck, I bought my SF house in May, 1990 at the top of a market peak and it was expensive then.
It's not an "obsession". But, OWNING is better than renting. Period

Downtown Gal - YES, the post was focused on my specific strategy as I decided to be a bit personal after 30 days off!

I just sold and and my thinking is to buy again, but to wait 1-2 years just to see how many things turn out; housing, if we'll have kids, my career, etc. So, buying right now just seemd too risky with a lot of unknowns which kind of scares me. Transparency is good, like greed, just like Gordon Gecko said!

Anyway, some answers:

1. If you have a stable job with steadily rising salary, no major lifestyle changes in near future, and at least a 3-5 year timeline to own, than I would seriously consider buying now rather than renting and buying later. Unless of course you are of the thought that housing has a ways to fall in short term!

As for the beginning of that last paragraph, I sont meet those requirements; self-employed, still unsure about kids after just getting married, and wouldnt have long timeline to own.

2. From the profit of my sale and my existing portfolio I can make about $1300-400/month or so in a 1YR CD yielding 5.76% or so.

www.worldsavings.com

So, if its completely safe why take risk. Thanks for the comment!

I will NEVER argue Larry's point that OWNING is better than RENTING. I consider this period of time a exception, until I put my money BACK into owning a home.

But the focus is there and I will certainly be hoping to find a deal in the near future to move on!

You can tell from my posts that I think in very long time horizons. That remains my message for building wealth over the long-term. (I did not say "slowly" there)
GETTING MARRIED?
Anyway I can talk you down from that tree? Lead you off of that highrise ledge? Pull you out of that quicksand? Yank you off that bridge?

I was commenting on the article, not his specific situation - owning is only better than buying if it makes economic sense. It doesn't right now. If prices decline 20% over the next 5 years and you put a 200k down payment down on a 1mil house you've lost not only all the equity in the house, but all the interest/investment return you could have on that 200k. Put your money elsewhere cuz you'll be better off renting and getting a return on your money with the current situation.

lol! Too late! Wedding was 3 weeks ago! got myself a great girl though and had to dig into Czech Republic to find her!

She even wears UrbanDigs T-Shirts!

"If prices decline 20% over the next 5 years and you put a 200k down payment down on a 1mil house you've lost not only all the equity in the house, but all the interest/investment return you could have on that 200k."

Dat true. Real Estate isn't for everyone....I guess. But, worst case scenarios on paper never match reality. Simply ask anyone living or not about their own real estate experiences in their lifetime. That's what I care about.
(it won't svae my info)

I was in Praha in June....

here's my situation:
I rent a 2br for 1300 and have a baby coming soon,
Wife and I have saved 155k and together we make 100k.

Our budget is roughly 300k, each year i stay in my apt is 15k of lost equity AND since the neighborhood we live in has LOTS of traffic i worry about the air quality.

this would be our first home purchase and I am going nuts trying to figure out what to do

Yea it doesnt save my info either. Its frustrating and I emailed MT 3 times about it with no concrete answers. Any clues to help?

BEGINNER BUYER - Hmmm. Where are you? Can you get a comparable and livable apt for your growing family with your budget? If you are making 100K combined, 8K or so a month, than you can probably comfortable afford total living expenses of about $2500 or so (30% debt/income ratio MAX) unless you have lots of other debt I dont know about or other monthly expenses.

If you find a home for $325K and bid your max of $300K, put 20% down, or $60K, and have to pay some change in transaction fees, you'll still have a nice chunk of change saved away. First year of homeownership is usually recover period anyway when you save money to replenish accounts by sacrificing some luxuries but not necessary expenses; i.e. vacation, or nights out.

If your job is stable I would say go for it, find the best product in your price point and stick to the best location, raw space, and light/views and long term you'll be fine.

Beginner:
1. Buy right.
2. You only get one shot at the final price.
3. Use a direct lender. No brokers
4. Have the seller buy you a one-year home warranty plan.
5. No 30-year loans.
6. No pre-payment penalty after year one
7. Don't use the listing agent as your buyer's broker.
8. Do not communicate directly with a seller or their agent.
9. Don't be petty. Make sure that you win, but only 75% of what you want.

Neither myself not my team in a real estate development company own a single piece of property.
There is no question that RENT wins vs. BUY, in this market or any market. It only makes sense to buy under this condition:
BUY FOR SHORT TERM: Buy, renovate and sell in a short term period (and make a profit).
BUY FOR A LONG TERM: Only for funds that are constraint with security rules (state, federal funds).

Individuals should always RENT.