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House - Buying Real Estate
Written by Karl Wolf   
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Buy or Rent a House: They Both Suck
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Now that the real estate market has tanked for three consecutive years, renting doesn't seem like such a bad idea. Until 2007, buying was considered the only financially sane option, a view strenuously espoused by those who profit handsomely every time a house is bought or sold - real estate agents. It goes without saying that you're likely to get a much better deal today than if you'd taken the plunge in 2005 or 2006, when every financial expert and his brother were touting home ownership as a no-brainer.  But should you buy or rent?

For nearly a decade, home ownership was billed as a sure path to riches and financial independence. Millions of renters tore up their leases and jumped on the housing bandwagon buoyed by stories of office clerks that bought a $100,000 homes in the nineties and just sat back and watched it appreciate to $500,000 by 2005.

If you go on the Internet, you will find thousands of 'rent vs. buy' calculators. They all do a fairly decent job of comparing mortgage costs to that of renting. Unfortunately their complete focus on the financial aspects overshadows the very fundamental differences between the two. What nobody tells you is the both renting and buying suck. Your job is to pick the option that sucks the least.

Buying

Buying a house is a big commitment. If you are living paycheck to paycheck, you should think twice about buying a home. First, if you don't have a 10% or preferably a 20% down payment, you don't have any business buying a house. If you're having a hard time coming up with the down payment, what makes you think you can take on the higher costs of home ownership when you're barely making it as a renter? How are you going to pay your property taxes when they come due and what are you going to do when the furnace breaks? Besides, forking over $50,000 of your hard earned money sucks no matter how anyone paints the picture of the "American Dream"

Equity

Buying a house isn't really buying, it's borrowing. If anyone tells you buying a house is a quick way to build equity - ask them exactly how much equity you are guaranteed to build in the first 10 years. Would you be surprised to know it's about 16% of the purchase price? After 10 years of making monthly payments totaling about 60% of the purchase price, that's what you'll get - a 16% ownership stake. I'm not going to hit you with any hardcore financial analysis in this article so just take my word for it - the equity you build in the first few years of ownership sucks. Of course you can build additional equity if the price appreciates, but there's always the risk that prices will go south - something we all conveniently forgot during the housing bubble.



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ross  - houses can be expensive |2011-05-13 15:28:26
I got a house a couple years ago and there are alot more expenses than i was expecting. I had to do alot more maintenance than i thought and property taxes can really add up also. I would advice to wait on buying a house, until you are absolutely sure it will be no problem for you to pay for.
Olivia  - portable housing |2010-08-30 15:14:11
I'm looking into a Tumbleweed tiny house. Portable, compact and if you like you can buy the plans and build it yourself.
Jenny  - Tumbleweeds are awesome! |2011-06-01 17:08:23
If you do enough homework online, you can find tiny house plans that also include running your utilities off of a garden hose and an extension cord. You can "camp" or "land" anywhere in the U.S. anytime. A permanent, one-time fee trailer plate is all you need and either a campground or enough friends and relatives to travel- throw them a meal once in a while for letting you sponge off of their electric and water and you're golden. No property taxes, no high maintenance expenses.....just a little insurance on your tiny piece of mobile paradise- ah....the life. Minimalist living at it's best.
AM  - Nice article, a couple of thoughts |2010-05-05 09:39:08
Buying is only more expensive now because of the insane run up of the last decade. Way back in the day (1997) it used to be cheaper to buy per month because you lacked the freedom to move and you were doing the up keep and maintenance yourself. In theory, your landlord is not just paying his mortgage with your rent but also providing a service.

That people expect to pay more to do everything themselves and be unable to move unless they pony up thousands in "finders" fees is a testament of how ingrained home ownership is in the American mental landscape.

And yeah, having both bought and rented I agree with you on almost every point. We're renting now and one of my biggest complaints is that the better housing stock exists only in the buy/sell world.

I'm also generally unimpressed with the landlords I've met. They have tended to fall into the "renters are dopes for renting and please don't call me with problems because that's work and expensive". Right...that's why I'm renting, because I don't want to deal with this stuff.

And lastly, the security deposit stuff is pittance compared to buying and selling costs. Buying a house costs at least $5K you'll never see again. Landlords have somewhat limited collection abilities beyond that security deposit. Throw $1K at a landlord, paint the walls hot pink (or whatever), and don't worry about it. (And don't move every year...)

frugal nomad  - Locking in your rent |2010-05-05 10:54:39
If you plan to rent in places like san francisco - you can take advantage of rent control laws which limit the landlord to how much he can charge. One of the things that prompts people to buy is locking in a fixed housing expense. Only a few places have rent control - the other one in California that I know of is Santa Monica.

The other thing about rent is that if you're taking off for a few months - it often makes sense to terminate the lease - put your stuff in storage and look for a new place when you return. Even a three or four month absence can justify closing shop. that way you eliminate a large chunk of your expenses when you're on the road.
Omiewon  - Los Angeles too |2010-05-05 14:32:10
LA also has "rent stabilization" which limits rent to 3% per year. But if they are doing a major renovation or selling the building they can get out of this if they pay you a lump sum. I had this happen about 8 years ago and saw my cheap rent go bye bye.
AM  - Rent stablization |2010-05-05 14:58:07
I never lived in a place with rent stabilization, although I live in place where housing costs are very high, relative to local wages.

The problem is rent control puts a damper on people building new buildings to house people, which would naturally bring costs down.

Also, buying property isn't always the way to "fix" a payment. Maintenance is always there and property taxes tend to go up as well. Seniors tend to get tax breaks (which I also think is a bad idea) for that very reason. (Although I often wonder if they can't afford property taxes how they could afford to upkeep the place..)
fugal nomad  - You could be right but ... |2010-05-05 15:03:56
You could be right in terms of your macro analysis - but if you look at it from the point of view of somebody who intends to be a renter for a longtime to come - rent stabilization is something that gives peace of mind. In a lot of cities, more than half the population rents and it's definitely something to take into consideration when you're looking for a place to rent.
debbie z  - Consider this... |2010-04-20 11:53:36
One point that is not really mentioned is that you can speed up the equity building remarkably by just sending a LITTLE bit every month toward principal prepayment. If you run an amortization chart you can see that on many loans that first 18 months your regular monthly payment will give you say a $56.12 payment toward principal. If you can send an extra principal payment of $25.06 every month you will really speed up your payoff. And the faster you pay down the balance the sooner you will be right side up no matter what the housing market is doing.

I started off only able to pay an extra $5 toward principal every month, by the time i had been in my house 2 years I realized I was sending about $40-60 every month. When I re-fi'd to lower my $590 mortgage payment to $349 it was those little amounts extra I had sent that had moved me from the maybe you can re-fi to sure, we'll gladly re-fi your loan. My hope is to pay off a 30 year loan in 20 years or less.

When I bought, my mortgage of $590 was about level with the rent on a 2 bedroom apartment with W/D connection. Now that same apartment (or a smaller, newer version) is over $750 monthly! I just wish I could afford to send an extra $400 monthly toward my mortgage as if I were renting.
Omiewon  - Like the way you look at this |2010-04-22 11:21:48
It's a great idea to think about how much the principal is and try to double it. Effectively you are doubling your equity interest in your home and there is very little that you have to come up with. It would get tougher as you moved along the amortization curve but most likely it approximates the inflation adjusted amount for rent.

To pay $349 a month for your own place is fantastic. If you were able to pay the original $590 a month, you would own it pretty quickly.

There is a widespread debate on whether it is better to pay of your mortgage early or invest in other instruments. The advantage of paying it off early is you never feel like you have excess cash and therefore aren't tempted to spend it. Then one day you wake up and realize that you have something worth $150,000 or more which very few people ever save up.
LeanLifeCoach  - Take a long-term look |2009-11-07 16:53:57
If you only plan on being in your place for a few years, you are probably right. You'd actually be better off with your parents. If you are looking for a long-term home, you've got to buy. Like anything there are market fluctuations. But whittle away at the note over your life and one day you can live without rent or a mortgage.
amp  - housing - a necessary evil? |2009-10-20 13:42:21
Renting or owning – true, they both have their pluses and minuses – but both are still better than living with your folks or your roommate from college – at least with the headaches you get from owning, you are still paying yourself for the luxury of four walls and a roof! Wanna put down roots – OWN …. Wanna live footloose and fancy-free – RENT.
Eddie  - what about renting out your home? |2011-07-06 13:08:45
I understand that buying limits your mobility, but what about buying and then if you need to leave renting it out? How about doing that with a condo? With a rental management company?

For what it is worth I am one of those that bought a house with no money down only to realize that one day it will need a new roof or HVAC system that I would not be able to afford. I had to cut my losses and am now happily renting with much less stress and saving a little money. Plus I have ideas of moving to some other places.
 
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