Why renting is better than buying

[Pilot Doc]

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Playing devil's advocate here for everyone who's primed to buy a house tomorrow.

(The numbers below assume a married couple with no kids. The situation is some better for singles and worse for those with kids, especially with a stay at home spouse)

1) The tax advantages are minimal. You have to itemize to deduct interest, in which case you lose the $10,000 standard deduction. Say you have $2,500 in misc other deductions (car property tax, charity, etc.) and you pay $7,000 in mortgage interest & taxes. Your total itemized deductions would be $9500. you're better off with the standard deduction and get NO tax benefit to home ownership. Even with $10,000/yr in mortgage interest, you only net a $2500 deduction for your $10,000 in interest.

2) The tax advantages are likely nil for the first six months. You will only have 1/2 a years salary in 2006. Between a student loan deduction or the lifetime learning tax credit, your tax bill will be near zero. (i.e. deductions won't save you much money)

3) You throw away lots of money on a house. Taxes, insurance, utilities, maintenance, repairs and the realtor's commission when you sell all go down the drain never to be seen again.

4) You won't build equity. The vast majority of your payments on a 30 year loan are interest for the first several years. Assuming no appreciation, a real estate commission will wipe out all your equity if you sell after 5 years of residency. (I realize homes typically appreciate, but the point here is that you make money on a house short term solely by appreciation - your principal payments really build no liquid equity over the length of a residency)

5) You are subject to large, unexpected expenses. A/C just quit? Too bad. $3000 please. If you don't have $5-10K available (cash or loan) for suprises, you shouldn't own a house.


Why should you buy a house? 1) Lifestyle or 2) no acceptable rental options. Don't buy one because you think it's a huge financial advantage over renting.

 

[fishmonger69]

Interesting thread so I cannot let it go.

Points 1 and 2 are completely legit. Anyone looking to buy for tax purposes only is making a poor decision. After owning for 4 years I can honestly say we never itemized.

Point 3 is misleading since nsurance and utilities (sometimes maintenance) are also a part of renting. Taxes are figured into the mortgage, so you think of it as part of the payment not a separate figure. Maintenance/repairs are not necessarily money lost as they can preservce/add value to the home when you sell. Commission can be reduced (5%) or completely dropped (FSBO).

If you do a 30 year note the only equity afer 5 years will be the down payment you make (with physicians loans you can do as little as 5% without PMI). Assuming no appreciate or loss of money from sales price is only relevant in a few markets IMHO (Cali being one since that market is ripe for a bubble burst in the next few years). Most homes appreciate at more than the rate of inflation. Not only that, but if you're smart with your purchase you can make a pretty penny. At the very least, you should break even between what you have put into the house and what you get back. This means you basically lived in a home for 5 years rent free.

Large, unexpected expenses can be reduced if you buy a home warranty for $300/year which covers most items in the home. I didn't have $5-$10k in cash/loan when I purchased, and the first item up for replacement was a roof. Does that makes things harder, or course. But we're all smart enough and resourceful enough to find a way to get things done.

The urge to buy is a strong one especially if you hate apartment living with thin walls and base thumping. If you want to buy, go for it. Just be prepared to do your research. There are tons of intangibles when selling a house, mostly related of course to location/location/location. For me, there was no way I was going to piss away $800/month for 48 months in medical school on a crap apartment. The same mentality applies to residency.

Perhaps the single biggest piece of advice when purchasing - DO NOT SPEND BEYOND YOUR MEANS!!! Use a Mortgage qualification calculator and check different lenders for current rates on 5/1, 5/1 interest only, 15 fixed, 30 fixed and 30 interest only. Also, only do interest only if you are certain your property will appreciate (waterfront, lakefront, etc)

 

[Pilot Doc]

For me, there was no way I was going to piss away $800/month for 48 months in medical school on a crap apartment.

That's the point I'm trying to rebut. Over 5 years, you lose essentially every penny you put into a house
1) interest - gone and (as you mentioned) little if no tax benefit
2) taxes - rolled into the mortgage, yes, but still gone
3) insurance - while you need a renter's policy for personal property, you don't have to insure the building itself.
4) Maintenance - does not improve the value of the house. (If it does either a) you got a good deal because the house was behind on maintenance or b) it's an improvement, not maintenance)
5) Major expenses - the home warranty is a good point. I'll mostly concede that.
6) Equity - close to wiped out even by a 5% comission - or the 3% you'd pay selling FSBO to a agent represented buyer. If you have the time/ability/luck to sell pure FSBO, that does change the caclulus

Every cent you spend on a house over 5 years is down the drain. You can only get it back with appreciation. That's likely, but not guaranteed. The incredible real estate runup over the last 5-10 years is not a historical norm.

A house is a combination of 1) a rental unit for which you an unpredictable amount that is equal or above market rates 2) a huge leveraged investment which can subsidize the losses on #1. You need to understand the risks of the second part

My overall point - the decision on buying vs. renting is not a slam dunk. There are nuances to it, and renting (if you have good rental options) is not an unreasonable option to consider.

If you can't rent a place that will fit your kids/dogs/boat/etc, if all the rentals in your city are trashed, if you desperately want a place of your own, etc - then by all means buy. Just don't do it because you think owning a house over 5 years is the only reasonable option.

 

[Jalopycat]

I've had a completely different experience. I bought my house 4 years ago. It was built in 1949 and renovated when I got it. I got a lot more money back on my taxes (when I was actually earning money) than I was getting before. I've spent a total of $90 on repairs during this 4 years. I also painted and had the wood floors refinished, but I consider that stuff "elective".

I would totally advocate buying a house. I've really had fun making it "mine", which is something you can't do with a rental. Also, I'm putting equity in something with my student loan money. If you rent, there's nothing to show for it. If I sell my house this summer, I'll probably make a 20K profit.

I see both sides though. Buying is a big committment and you do need to be willing to stay in the same place for awhile.

 

[RichL025]

Two counterpoints:

1. There is an intangible benefit of living in "your" house. Yes, if the heating system goes, YOU are the one who is out $7K to get a new one (don't ask me how I know this), but OTOH, if you don't like the way something looks or works, you have complete freedom to scrap, change, fix or otherwise modify it.

Sine you wont have any possibility of having to move from year to year (as your lease is up, and if the landlord elects not to renew it), you will tend to take more pride in the condition of the building & yard. It's _yours_, not some faceless company's property.

2. Even though the tax advantages _may_ not be as robust as are frequently touted, in many markets, appreciation over and above the stock market is a fact. While the vast majority of your monthly mortgage goes up in smoke (as interest), the _entirety_ of whatever rent you pay is gone forever - despite 6% going to the realtors (and this number is actually dropping as more owners sell via FSBO, and realtors take 5% to compete against each other), you come out six years later with money in your pocket to put down on another, nicer house (or refinance).

Still, to each his own. Trust me, when I was shelling out $$$ for all the little things going wrong in my 20 y/o house, I was wishing I had a landlord to call and say "come fix it NOW". Still, we have a beautiful house in a nieghborhood of Tacoma with good appreciation prospects, and at the end of the day, I LIKE the intangible of being a member of the propertied classes instead of the landless peasantry 😉

 

[Pilot Doc]

and at the end of the day, I LIKE the intangible of being a member of the propertied classes instead of the landless peasantry 😉

Which is an excellent reason to buy a house!

 

[Plastikos]

Interesting thread so I cannot let it go.

Points 1 and 2 are completely legit. Anyone looking to buy for tax purposes only is making a poor decision. After owning for 4 years I can honestly say we never itemized.

Point 3 is misleading since nsurance and utilities (sometimes maintenance) are also a part of renting. Taxes are figured into the mortgage, so you think of it as part of the payment not a separate figure. Maintenance/repairs are not necessarily money lost as they can preservce/add value to the home when you sell. Commission can be reduced (5%) or completely dropped (FSBO).

If you do a 30 year note the only equity afer 5 years will be the down payment you make (with physicians loans you can do as little as 5% without PMI). Assuming no appreciate or loss of money from sales price is only relevant in a few markets IMHO (Cali being one since that market is ripe for a bubble burst in the next few years). Most homes appreciate at more than the rate of inflation. Not only that, but if you're smart with your purchase you can make a pretty penny. At the very least, you should break even between what you have put into the house and what you get back. This means you basically lived in a home for 5 years rent free.

Large, unexpected expenses can be reduced if you buy a home warranty for $300/year which covers most items in the home. I didn't have $5-$10k in cash/loan when I purchased, and the first item up for replacement was a roof. Does that makes things harder, or course. But we're all smart enough and resourceful enough to find a way to get things done.

The urge to buy is a strong one especially if you hate apartment living with thin walls and base thumping. If you want to buy, go for it. Just be prepared to do your research. There are tons of intangibles when selling a house, mostly related of course to location/location/location. For me, there was no way I was going to piss away $800/month for 48 months in medical school on a crap apartment. The same mentality applies to residency.

Perhaps the single biggest piece of advice when purchasing - DO NOT SPEND BEYOND YOUR MEANS!!! Use a Mortgage qualification calculator and check different lenders for current rates on 5/1, 5/1 interest only, 15 fixed, 30 fixed and 30 interest only. Also, only do interest only if you are certain your property will appreciate (waterfront, lakefront, etc)

I totally agree that it should be a personal decision instead of solely financial. My desire to buy is solely personal, but i like to listen/read the negative comments b/c its always good to hear both sides. For me, the good will outweigh the bad as i too will love personalizing my house, and will torture my kids with yardwork, lol. I hope that it is also a financial plus, but it definitely is not my main reason.

 

[supercut]

There's another reason not to rush to buy....what if you don't like your program and want to switch? Or go away somewhere else for a research experience?

I was all set to buy like everyone else in my class. Only one person advised me to wait. Within weeks of starting residency, I realized that my program was not what I thought it would be. Fortunately, there had been a glitch in the mortgage application process and I had taken a 3 month lease with the intent to buy after I got here. The fact that I hated my program was the main reason I aborted my search.

The second reason I wound up renting is that, in my city, the houses that are affordable on a residents salary generally need work. Every house I looked at would have needed a major repair over the subsequent 5 years, be it a roof, a furnace, or something equally pricey. I decided that it would be incredibly inconvient as a single surgery resident to coordinate such repairs, and I'd rather spend that money on having fun stuff like ski trips. Plus, I didn't want to have to come home after a long day and mow grass, or shovel snow at 4am. If, like me, you're flying solo, you'll have to deal with all life's scutwork alone as well as all the hospital scutwork.

I never was able to find a spot at a better program, so I"m trying to make the best of that. But I found very cool apartment that I really like, and the heating bill is much less than that of a house, cable is included, the parking lot is plowed for me, and nothing is breaking down because everything is newer than I would have been able to afford in a house.