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Jul 27, 2015 508 comments

Rent vs. Buy: If You Have to Ask, You Should Probably Rent

Image Credit Martin St-Amant – Wikipedia – CC-BY-SA-3.0

Four years into writing this blog, I thought I had seen almost everything when it comes to the most common financial suicides committed by the middle class. But today I was hit in the head by a shocking realization:

When choosing between buying versus renting a house or apartment, people are making much, much worse choices than I would have thought possible.

The implications are so striking that logically, some of the world’s busiest stretches of road should not even exist. We could save millions of lives and trillions of dollars by just helping certain people operate a basic hand calculator at a beginner level. It sounds improbable, until you review the following stories from this Canadian vacation I am currently wrapping up:

Case Study One: North America’s Fourth Largest Miscalculation

The City of Toronto is famous as one of the world’s most happening and expensive places to live. With over six million people in the highly car-oriented metro area, it sprawls on forever and people commute in from an insane zoo of connected cities comprising 31,000 square kilometres, or roughly a quarter of the entire land area of England.

There’s only one real highway across this thing, the 401, which has the dubious distinction as  busiest and most traffic-jammed highway in the world. Rush hour extends roughly from 3:30AM to 11PM, so I don’t even attempt a crossing except in the 4-hour window outside of that range*.

So what has created this incentive to commute? There are great jobs in Toronto – some of the highest paying in the country. Unemployment is low. The city is clean and quite beautiful along the lakeshore and the many ravines and rivers. But unfortunately, as the saying goes, nobody could ever afford a house there. Average price for a detached residence is up to $1.05 million, and even a car-commuter special runs you $730k. If you don’t have that kind of money, you just follow standard Realtor advice and “Drive ’til you Qualify”.

Mr. Money Mustache Moves to Toronto

For years, I have accepted these prices as a given and told people to either get creative with roommates unless you have secured at least a $400,000 salary, or get the hell out of the whole area as I did.  Until I conducted a little experiment in Mustachianism: asking myself “what would I do if I had to move to Toronto myself?”

Let’s assume a worst-case scenario, because if you can prove that it also covers every other situation. Somebody offers me a job in the most expensive and hardest-to reach region right downtown. It’s an a amazing job that I can’t resist and it pays well.

And wanting to maintain my current luxurious lifestyle, I insist on only the best: living in a huge apartment in a brand-new, modern building near the shore with beautiful views, within walking distance of work, the stadium, the train station, and everything else downtown has to offer. No buses or subways for me, and let’s assume I’m not even willing to ride my bike, because hey, it can occasionally get snowy in Toronto and nobody can possibly ride a bike in winter.

So I pull open the useful apartment-hunting site called padmapper.com and set my criteria to unlimited price, insisting on 2 bedrooms and 2 baths, so I can comfortably bring my family along for the ride. I select one of the nicest looking listings at random, because it overlooks a park with floor-to-ceiling windows, has a sweet balcony, granite and stainless kitchen, and heck, there’s even a gym and a rooftop patio on this 40-story building:

pad

This place looks appropriately fancy. A high-end pad in an expensive city’s most desirable district. I brace myself for an astronomical price, because after all, let’s look at the math:

People are commuting 40 minutes from $700,000 houses in the “closer” suburbs. A $700k house costs a minumum of $4,000 per month to operate in this area counting only mortgage interest at today’s amazingly-cheap-but-temporary 2.5%, a 7% opportunity cost of capital in the downpayment, plus property taxes, insurance, heating/cooling and maintenance at 1% annually. Let’s assume you’ve been wise enough to avoid areas with an HOA. 80 daily minutes in a car translates to roughly 900 miles ($450) and 22.5 hours of your time (say, $900) a month, for a grand minimum total of $5350.

All that, just to live near nothing but strip malls and TV-watching suburban commuters. So I’m assuming an apartment like this would list for upwards of ten grand a month. I look at the price.

$2300 per month

 Oh, and that includes free heat and an underground parking space
(parking for mere mortal visitors in this area costs about $30/day)

Is this a joke? Are apartments really that cheap? Looking through a few dozen other listings in the prime areas, I realize that yes, they are. And if you’re willing to be really badass and step onto a subway for your morning commute and move down to a less luxurious apartment building, you can find central-Toronto 2/2 apartments for $1200.

Share one of those with a roommate, and you can work a minimum wage job ($11.00/hr) in this city, pay for rent and food, and still save almost 50% of your income, retiring from your job working at Starbucks by age 37.

I repeated the same experiment in Canada’s capital city of Ottawa. Brand new 900 square foot luxury apartment with 9 foot ceilings and two walls of glass overlooking the city’s hottest “Byward Market” district: $1950 per month. And this is in a city where people defy death by driving an hour through a blizzard before paying for parking and heading in to the office. It’s also a city where some people spend $900 per month on their winter heating bills alone (this apartment also includes free heat).

The implication of this is that an amazing majority of the traffic jams, car dealerships and SUV pileups and harried lifestyles and stress-related diseases and obesity that come with a car commuting lifestyle are completely stupid, optional, irrelevant byproducts of our choices. Almost every expensive suburb should not even exist. Every major urban highway should be shut down and converted to gardens and bike paths, with a few solar awnings thrown in – just enough to power the entire city.

So I ran these numbers by a fellow Canadian, expecting full astonished agreement. Instead I got the start of a bizarre set of justifications:

“But people want a back yard. For their kids, or their dogs.”

Are you JOKING?? When you live in a high-end district, ignoring the fact that luxury apartment buildings typically have amazing landscaped common areas, you have literally a multi-billion dollar back yard. The Toronto lakeshore is an endless expanse of beaches, bike paths, fountains, gardens, play structures, volleyball courts, patio restaurants, and of course one of the largest expanses of sparkling blue freshwater in the world. In Ottawa you have a stunning riverfront, forests and parks and bike paths that lead everywhere, and rapid transit that would eliminate any need to ever own a car.

Would you really waste an extra $3,000 per month just so your kids could play on your personal fenced-in postage stamp overlooked by vinyl-clad suburban houses in every direction while you are out stuck in traffic? No.

But what about the dogs?

$3,000 per month, plus the $400 it costs to feed and treat and house and transport and occasionally kennel the a dog, compounds to roughly $588,200 every decade if you invest the money instead. That’s every decade, and they live longer than that. Are you really rich enough to spend a million dollars, and clean up warm squishing chunks of excrement daily with only your bare hand and a plastic bag, just so you can have this extra bit of companionship during your sparse time outside of work? No.

And we haven’t even mentioned one of the biggest joys of renting: unlimited mobility. On a whim you can jump to a new place anywhere in the world. Never be subject to the pain of fighting with buyers in a hot real estate market, or begging for sellers in an icy-cold one.

The lesson? If you live in an area where houses cost more than $300,000, take a close look at the rent prices around the areas you currently drive. Budget your driving costs at at least a dollar per mile (80 cents/km in Canada to account for higher costs) because you absolutely must put a high value on your spare time to get ahead in life. Doing the math on life decisions like this was by far the biggest factor in my own early financial independence.

Buying a house is a great thing to do when you’re settling down in a beautiful, affordable spot right near everything you need to do for the next ten years. And if your schedule and temperament allow some time for a good several hours a week of maintenance work. But for the rest of us, it’s worth having another look at Rent vs. Buy.

Further Reading: The New York Times has a pretty great Rent vs Buy Calculator that covers many bases and includes some nice conservative default assumptions (except I’d personally assume higher than 4% investment returns and less than 3% property price appreciation in expensive markets where the price-to-rent ratio is out of whack, such as those in this article). Also, many areas have property taxes higher than the default.

The biggest difference between NYT and MMM is just the focus on location. Rentals often dominate the market in the most expensive and walkable areas, so if you want to work and live in such a place, it might make sense to go straight to the apartment buildings.

*Luckily we have now switched to taking the VIA – here’s a video I took out the window of the train traveling at 150 km/hr past a line of car commuters stuck in the usual jam leaving Toronto. This train is both faster and (usually) cheaper than driving a car the 450km from Toronto to Ottawa, which reveals a few hundred million more dollars of savings available, since thousands of people make this drive in any given week.

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  • CF August 2, 2015, 1:29 pm

    And then you have articles like this that spread misinformation: http://www.foxbusiness.com/personal-finance/2015/07/29/4-reasons-why-it-still-good-time-to-buy-home/?cmpid=edpick&google_editors_picks=true.

    Look at reason #3 – Owning is Cheaper than Renting – supported by some lame stats, which even if true, prove nothing.

    Reply

  • Heidi S. August 3, 2015, 9:33 am

    We’ve been renting in Boston for 8 years in an amazing downtown neighborhood (Charlestown) where I walk to work, walk the kids to school, walk to the store, etc.
    We are convinced that the suburbs (hour train commute for me) would be better for our family for various reasons (stability, pride of ownership, opportunity to put roots down, feeling like we are investing in OUR home vs. someone elses home, etc.). But I’m starting to question our resolve.
    After reading MMM for a long time, I felt pretty confident that a huge reason he is successfully FI is that he owns his own home outright – no mortgage. What does a never-ending output of $2050/mo rent do to a long-term FI calculation? Isn’t the whole idea that by buying you will eventually get to a point where you are eliminating that payment from your budget?

    Reply

    • Jay August 3, 2015, 11:13 pm

      That’s an excellent question, Heidi, and while I don’t presume to know for sure how MMM would answer himself, my answer is this: Because in many more cases than most people think, at the end of a, say, 20-year period, you end up with more equity when you invest in the financial markets than if you buy your residence. Plus, the equity in the residence is not liquid, and not partially liquid. Even if the value of the residence has increased more than if you had invested in financial markets, you cannot realize the value until you sell it, and either move to a less-expensive area or downsize. Many people do that, of course.

      Me, personally and for reasons other than purely financial ones, until I’m FI, I prefer to rent – given the rent/purchase price ratios where I live. After I’m FI, and can presumably afford to buy a residence in cash, I might come to a different decision.

      Also, if you’re interested in an academic discussion, see my earlier comment regarding the hypothetical questions, “Would you still buy if the rental cost was zero?” and “At what price would I, a committed renter, buy a residence?”

      Reply

  • The Investor August 3, 2015, 1:45 pm

    Following this logic with regard to the London property has cost me, conservatively, at least £200,000 – even after backing out the investment gains I’ve made elsewhere.

    Property price rises like we’ve seen in London – and Toronto, I guess – make a mockery of these sober-minded price-to-rent comparisons. Only something like a 30-50% crash in London house prices can save me from a lifetime of slapping my head whenever I think about it now.

    I’ve built up a very sizable warchest elsewhere. I’ve even made plenty of money from the shares of housebuilders. But so successful has this investing effort been that I now have a significant six-figure sum outside of tax shelters.

    This is sort of a disaster, because it means that should I cash in my unsheltered portfolio to buy a property, I’ll face at least a 28% capital gains tax hit, promptly obliterating a huge chunk of said property-substituting hoard.

    The £11K or so tax-free allowance is routinely described as “generous” by personal finance bloggers. But it’s not so generous if you end up doing something slightly different from the herd.

    I was therefore starting to think I’d just rent for life on the back of the dividends, but of course those are now set to be taxed, too.

    I’ve considered London property ‘too expensive’ for about the past 13 years, which was when I backed out of an almost flat purchase as soon as I got the chance.

    In contrast, numerous friends put down 5-10% deposits on London property (usually but not quite exclusively raised from family, not savings) and then got a big chunk of other people’s money via a mortgage, which they have doubled or tripled over the past 15 years.

    This vast gain can be realized entirely capital gains tax-free – a massive tax perk that I think should be extended to those of us who rent, but never will be.

    Worst of all, over dinner they then discount all this, saying idiotic things like “a home is not an investment” and it’s “only a paper profit”. They are wrong.

    Firstly, it’s very hard to safely leverage an investment portfolio, compared to how trivially easy it is to leverage a house. Secondly, there are enormous tax benefits to owning a house in the UK versus a portfolio of shares, to the extent that it is again trivially easy to shield uncapped wealth in a personal property, as opposed to the six-figure capital gains that would be due on my ‘house substitute’ portfolio if I decided to liquidate it to buy a home. These are problems, albeit first world problems.

    I haven’t made the best decision because London property has doubled, at least, since I first made it by the same maths. I’ve made the wrong decision so far. It might be the best from here though, granted

    Reply

  • Shawn August 3, 2015, 10:42 pm

    What do you guys think I should do? I live in SoCal, make about 100k before tax, rent here is super expensive, but I’ve found a nice but small apt for $1155/month, my TOTAL expenses including rent/utils/cell/car/insurance/food/etc total $1500 a month on average. I can afford to buy a house, but even your basic 1000sqft house in the Burbank area where I live is 500k minimum for something halfway decent if you’re lucky. I currently put away $1000/week automatically into Vanguard investments, as well as maxing out my trad. IRA every year, on top of that I generally end up putting away another 10-20k a year with excess in my checking/emergency fund that the auto invest doesn’t eat up. I’ve just started on this plan within the past year, 33 years old, and currently have 185k in Vanguard and 15k in checking.

    I often wish I had a house for entertaining etc, but I’m also not married and live alone and like it that way, and being in the entertainment business I am often working 60-80 hours a week so I could basically sleep in a cardboard box for all I care except for the small amount of time I have off. Should I just keep on the same plan and be happy about it in my 40s, or try to enjoy my 30s a little bit?

    Reply

    • Jay August 4, 2015, 11:52 pm

      First of all, congratulations on your situation.

      However, I wouldn’t equate “enjoy-my-30s” with spending money.

      One of the core components of Mustachianism, as I understand it, is that spending money actually results in less happiness and enjoyment.

      If you’re not happy or enjoying yourself at your current income and expense level, it would be difficult for me to believe that you would enjoy spending more, and delaying financial freedom, or that it would make you happier.

      Nonetheless, I think you’re doing great and wish you financially freedom!

      Reply

      • Shawn August 6, 2015, 10:36 pm

        Hello,

        Thanks for the response, you are right, I think part of my issue is I work so much that my time off I am so exhausted I just want to relax at home, and in my head I feel that if I had a bigger place I could invite people over etc, I’m often invited to do things on the weekend, but I’m just so shot I feel I need some downtime. I guess I have romantic ideas of my grandfather’s time when people would come over on the weekends for house parties, however he could buy a house for a reasonable price.

        I do know in my head that the short term happiness will quickly disappear when I realize how much more I will be spending, which is why I haven’t done it yet, same with cars, I LOVE cars, but I know buying something I want right now isn’t a good decision when my current boring econo car does the job (plus right now the show I’m working on is only a 4 mile commute each way).

        Anyway I guess I’m also just sometimes wondering if I’m going to be living in this area for probably at least the next 10-15 years anyways, maybe I should just buy a house, but on the same note house prices in SoCal are out of control, but who knows they may only keep going up. Anyway thank you for the advice I really appreciate it I don’t know anybody who I can remotely even begin to talk to about it.

        Reply

        • Robert August 13, 2015, 4:13 pm

          Hello fellow Socal Resident,

          I am in a similar situation as you. Just a little further down the 405 in Irvine.

          I think a question to ask yourself might be are you working too many hours? If you love your job and work and where you’re at I say go for it. But if you’re exhausted from working 60-80 hrs a week how would owning a home increase your level of happiness? Sounds like it would only add more todo items to your list.

          Can you entertain friends in a park for a picnic or at the beach?

          Kindest regards,
          Robert

          Reply

          • Shawn August 13, 2015, 10:24 pm

            Thanks Robert,

            Issue is I work in TV, and those are the hours. There is no option to work less, unless I don’t want to work. The nice part is when the show is down, I can sometimes have a month or two of vacation, which is great after making a pile of money (of course entertainment is a lot like being self employed, we are employees but there is no guarantee of your next job).

            That being said, the only reason I make what I do is because of the overtime (and decent wage due to high cost of living, thus I’m going able to save so much by living super frugal), a standard day in film/tv is always 12hrs at least. I guess in my head I’m thinking I’ll just keep on trucking and try to have a bit of fun when I can, and once I have enough money I’ll transition to something else, whatever that will be. I guess that’s why in my head I thought if I had a home more apt to entertaining I could invite people over to hang out, especially if my plan is to keep doing what I’m doing until I’m a millionaire.

            I really appreciate the input Robert thank you.

            Reply

            • Sarah October 27, 2015, 12:55 pm

              Hi Shawn! I’m also in Burbank and in film. Maybe scout out and see if you can rent a house, or something like a house while socking away the money. A friend and I live in one of those numerous 1940s/50s 4 Plexes in the North Burbank/West Glendale area. Perfect for entertaining because we have a little fenced in side yard and a back patio.

  • JB August 4, 2015, 9:46 am

    Ditch the dog and buy an apartment by a park.

    Reply

  • ExCanuck August 5, 2015, 3:38 am

    Only wild real estate speculation (Toronto & Vancouver bubbles) can have rental yields be as low as they are in those cities today. Not a chance in h-ll I’d buy something right now in Canada.

    Here in Tel Aviv, I’m renting a $1M+ (USD) apartment for $2200 USD a month — about a 2.65% yield to the owners. Rental yields are not following purchase prices, as average income is still very low compared to booming property markets. My friends in Sydney however are seeing rental rates of around 3.5-4% which is a bit more reasonable in another frothy market.

    Sometimes I think I’m missing the boat when it comes to the real estate run-up in the last 5 years, and on those days I look at the S&P500 and realize I didn’t really miss the boat at all.

    Reply

  • carwel33 August 5, 2015, 3:01 pm

    I would never buy in Toronto or the crazy expensive suburbs. Out where we live (east of the city), you can still buy a nice home for $300,000. The same house north or west of Toronto would be $700,000, and the commuting time is similar. Plus the 407 is making its way out here. I love my little home (with a veggie patch in my postage stamp backyard), and our town feels more like a small town, than a suburb. Also, I actually hate being in the city – I’m always so relieved to leave. Just an alternative to think about for GTA people who would like to own…

    Reply

  • Karl hungus August 5, 2015, 3:31 pm

    Mr. Mustache,

    What percentage of your take home pay do you think should be tied up in housing? I think I’m sitting at 37%. Is that too high ? Maybe you could even do a post about it.

    Reply

  • FLGirl August 10, 2015, 5:37 pm

    I generally agree with your commentary, MMM. But I must raise my contention regarding the $400/mo dog cost estimate. Of my 44 years, I have lived only six years without one or more dogs. Never did I pay anything approaching $400/mo–and my 16-year-old sheltie had acupuncture every other week for a year because of arthritis. (In the last 10 years of dog ownership, I averaged about half that for two dogs, including vet visits, heart-worm meds, food, etc., for a 20-lb sheltie and a 55-lb husky mix).

    I’ve gone without a dog for four years now, and it’s about all I can stand (partner, who wasn’t raised with dogs, took the death of the sheltie pretty hard). My kid is five now, and as soon as we move to a different state next year, my husband says he’ll be glad to bring another canine into the family. I truly believe that having a dog, and especially growing up with one, makes you a better person (I’m sure this is true of other types of pets too, but my experience is with canines).

    Sure, not spending money on a dog means more savings in the end. So does not having a kid. But neither of those scenarios sounds like a good life to me. Being smart about money also means being smart about what has value to you–what you’re willing to trade those hard-earned dollars for. I haven’t had a TV for 12 years, and my wardrobe is shit. But I’ll shell out an average of $2500 annually for that unconditional love and companionship from a dog because they project and elicit happiness in one of its purest forms. Just wanted to throw in my perspective.

    Reply

  • Still in Toronto August 11, 2015, 5:02 am

    We recently decided that buying a home in the Greater Toronto Area was a poor choice at the moment and decided to rent an almost new condo 25 minutes north of the city. Total cost of putting a roof over our heads is under 1500$ a month, (Electricity, and Internet are the only utility bills). We have been, however, struggling with the lack of space for projects, as we are the crafty DIY type. Working on cars, refinishing furniture, or planting some basic vegetables are impossible in a Condo building. Particularly working on cars, a huge passion of mine, and a necessity as we still require our cars unfortunately. Working on cars requires a trip up to my parents house which has a garage, but with the driving this eats up entire weekend days. Condo rental can be a cheap alternative, but I was a bit thrown back when MMM said he would move into a condo because if you are like we are, and like to work on things. you will have to give up a lot of your money saving hobbies, and shell out cash for things you would otherwise tackle yourself. Condos do have great gyms and pools, but they lack hobby rooms where you can get stuff done,and lack the space to store serious mechanic/carpentry tools.

    Reply

    • Maxwell C. August 12, 2015, 11:33 pm

      I think that actual *condos* are a bit of a scam due to the ridiculous fees they charge. If I want a gym…I’ll buy a fucking gym membership! (I’d rather just keep running for free though)

      And life is all about give/take.

      Reply

  • theta August 11, 2015, 5:44 am

    This is mostly a suburban house vs city apartment comparison, rather than a buy vs let comparison. It is entirely possible to rent a suburban house or buy a city apartment. It would thus be more useful if the comparison was on a like for like basis.

    On that basis, I will try to give you the picture of another, arguably more overpriced, market: London. In London, a typical 2-br apartment that costs 2.5k per month to rent will cost 1m to buy. Taxes, insurance and maintance will cost a maximum of 5k a year, bringing the net yield down to 2.5%. A typical 2-yr fix mortgage, depending on loan to equity ratio, costs 1.5-2% (including all fees, commissions etc.). Therefore, there’s a net positive carry of 0.5-1% per year, which depending on your view may or may not justify buying vs renting.

    A few more points on this:
    * Opportunity cost of deposit: I wouldn’t put it at 7%, which is the long-term expected return from equities. I would rather put it at the after tax yield of a safe asset, such as government bonds. Why? Because, unless you plan to live on the street, you will pay rent with 100% certainty. The income stream you therefore effectively get with this downpayment (the saved rent) is equivalent to AAA rated bond, as opposed to equity.
    * Interest rate rises: They are very likely to happen, and if they do, they will change the equation, as this carry buffer of <1% will disappear. At the same time, rates will only meaningfully increase if there is wage growth which will certainly translate into higher rents, so it's still entirely possible the buyer will have been better off.
    * Given transaction costs in London, the 1% positive carry per year means you need at least 6 years of staying in the same place in order to just break-even. Even more if you consider that the carry may be less favorable in the future. So the flexibility argument in favor of renting still remains.

    Reply

  • Rod Hoover August 11, 2015, 8:41 am

    This post focuses on when houses are in a bubble, and when houses are further away from work than rentals. But what about a hypothetical situation where you can rent one house or buy another on the same street, homes aren’t in a bubble, and the mortgage payment is the same as monthly rent. I still feel like renting while investing in REITs is better than buying a house because you are more mobile and your real estate investments are more liquid and more diversified. I can’t convince my Dad of this though, due to the standard “rent is throwing your money away” argument. Who is right?

    Reply

  • Julie August 12, 2015, 11:53 am

    This article peaked my interest because I recently bought a house in Ottawa. As a 30 something that has always lived in apartments to save money, I felt the urge to set roots. Part of me knew that it made more sense to rent downtown and walk to work, but I wanted a yard and a space that was my own. As an introvert, I don’t find central public parks very relaxing and enjoyable. That being said, I knew that emotions couldn’t guide this decision. After seeing way too many houses (and developing a deep respect for my agent), I paid $385,000 for a 1960s bungalow in the suburbs. It backs onto a ravine and the yard is amazing. It is a 20 minute express bus ride downtown and it costs me $100 a month for a pass. I have been reading MMM since its inception, and have been inspired by DIY. My husband and I refinished the hardwood upstairs and put a small kitchen for a rental suite in the basement, adding $20,000 to the value of the house. Having only put 10% down (and paying mortgage insurance which I accept is foolish), my mortgage payment is $1,600 and we rent the basement for $800. The cost of the house is much more once including property taxes, utilities, and maintenance; however, it is affordable because the $800 we pay goes directly to the principal on the mortgage. The whole point of this comment is to provide reassurance that you can own a home in Ottawa and still be financially smart (this may not be the case in Toronto). I love our house, and it makes me very happy. Happiness counts and sometimes yards, pets and houses provide much joy. Thankfully, I found a win-win situation with a bit of hard work and patience.

    Reply

    • Kathy Abell August 13, 2015, 12:48 am

      I would say you get points for 1) taking the express bus to work rather than driving a gas guzzling clown car as its only occupant, and 2) converting part of your home to an income property which pays half your mortgage amount. While there are many financial arguments regarding rent vs buy, sometimes you just have to follow your heart and take the path that makes a bit less financial sense but brings more contented satisfaction to your life. The key is not buying more house than is really necessary. Yes, a 3,000 say ft house might be nice, but the carrying costs might bust the budget; perhaps a home half that size (or smaller?) would be perfectly fine.

      Reply

  • Edward Chick August 13, 2015, 2:37 am

    I just bumped into this article. While I understand the logic behind this, I would love if you could give me some clues. Because your Example were too simple, and I live in Hong Kong. possibly the worst Housing price problem in the world.
    ( If anyone know of any other place on earth that is even worst then Hong Kong i would love to know ).

    In USD, cheapest housing price in HK is around $385,000, and you get a flat roughly 300 ft2. Yes you read that right, not a room, but a flat with kitchen and toilet. Median Household Income is around $3000.
    Surely you should only buy when the price level is acceptable?

    http://www.bloomberg.com/news/articles/2015-01-19/hong-kong-sydney-housing-affordability-worsens-as-n-z-improves

    Surely you should rent and wait for the moment?

    Would like to see some advice.

    Best Regards

    Reply

  • Angie August 13, 2015, 8:38 am

    Interesting read that really got me thinking. I lived in Chicago for a few months after graduating college. I rented an apartment there for $1000 – it was a great 1b/1br apartment right in the city, close to the lake trail for running. I loved it! Definitely a no-brainer. When I moved back to Michigan I ended up buying a house. Renting an apartment close to work was costing me $1280 (upgraded to a 2bed/2bath with my boyfriend). We opted to buy a house and our interest + principle + insurance + taxes is $1150 a month in the same neighborhood our apartment was in. I’m not factoring in repairs but we shopped around and bought a newer house that shouldn’t need any major repairs for a while. (Obviously things can come up but I don’t mind the risk I guess). I do get a lot of enjoyment out of owning a home so I suppose I do think of it a bit as a luxury. Plus, we bought at a decent time when prices were low and our home has already increased in value. I’m also working on paying it down quickly (another debate, I know) – so hopefully in a few years I’ll be just paying the low property taxes and my stache will be quite substantial before I’m 30. I suppose as long as you’re thinking about things and trying to save as much as you can you’re still on the road to early retirement.

    Reply

  • Leslie August 13, 2015, 3:12 pm

    Great article! Actually, are you stalking me? ;) Pretty much sums me up completely. I live in LA and walk three lovely blocks to work everyday. I also have access to three parks that are less than a mile away which I jog at most days. Most of my friends think I’m throwing away too much money on rent, but considering my lack of commute, extra exercise walking to work and additional time at home, it’s a no brainer. I invest like crazy and that huge amount of plumbing work that just had to be completed on my building? Other than the inconvenience of a few hours without water, no problem. Didn’t cost me a penny. Granted I plan to eventually retire to a much lower cost of living area and most likely purchase a home, but it’s not a good fit for me right now. Renting is not always a bad idea as your article so well explains. :)

    Reply

  • Jeremy E. August 14, 2015, 3:04 pm

    This is similar to one of my favorite posts that I have referred to many people.
    http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

    Reply

  • Matt August 14, 2015, 7:16 pm

    I love this article and agree with most of it – I think home prices, especially in major U.S. metropolitan areas, are grossly overpriced, especially with the coming interest rate shock. However, one challenge I have is looking long-term, especially with regards to inflation. If you have a fixed mortgage payment, your monthly payment won’t change that much (hence all the baby boomers who bought their houses in the 60s paying hardly anything in mortgage costs). Yes, maintenance and property taxes rise, but the impact would be much less than the growth in rent costs as they track inflation over time.

    Though this is an extreme example, if you bought your house in 1960 for $16,000 with a low downpayment you’d have been free and clear for decades by now. If you had continued to rent over that time period, you would probably be forking over $2K for that 2-2 apartment in an urban area.

    I do agree that renting is favorable over buying in some situations, but over the long term I think buying wins out. Personally, I’m holding out for a 2-family or quadplex so I can get some income off my living situation.

    Reply

    • Jay A. August 16, 2015, 12:55 am

      Matt, I think even in your hypothetical extreme scenario, and in many more cases than you might think, it is favorable, financially, to invest the money for the down payment and the savings from renting, even and especially over the long term.

      According to https://www.census.gov/hhes/www/housing/census/historic/values.html, the (unadjusted) median price for a house in the US in 1960 was $11,900. The median price was $119,600 in 2000 (the last year that appears on the page). Using http://www.bankrate.com/calculators/retirement/roi-calculator.aspx, the value of a median-priced house increased a hair less than 6% each year.

      I would argue that, given property ownership and maintenance costs vs investment fees, most people would actually have made more money by investing the down payment, paying rent, and investing the savings.

      In 1960, BTW, the median gross rental was $71, according to https://www.census.gov/hhes/www/housing/census/historic/grossrents.html.

      Reply

      • Matt August 17, 2015, 8:18 pm

        Thanks for the reply, Jay. I do think there’s a good case to be made in investing the money you would spend on a down payment in stocks instead. However, either way, the rent you’re paying is 100% losses, while with a house you’re really just losing the payment in interest/taxes/maintenance. If you look at a 30-year period, your rent might go from $1,600/year to $16,000/year, while your property taxes might go from $240/year to $2,400 and maintenance might go from $300 to $3,000/year. However, your principal/interest payment wouldn’t change at all (if you have a fixed rate mortgage).

        Another way to look at it is that once your house is paid off, it’s basically an appreciated asset that gives you a dividend in the form of not paying rent. So your dividend is basically the difference between what you’d be paying in rent – any property taxes, insurance, and maintenance you’d pay. If the above example was for a $400K house, it’d pay a dividend of $10,400 (2.5%) annually, about what a treasury bond would yield. If you can sell your house and invest it elsewhere at a higher risk-free return than this rental-avoidance yield, then go for it; however, I think in most areas of the country, it’d be better to avoid paying rent than to earn the equivalent in interest payments from the house’s equity.

        Reply

        • Jay A. August 17, 2015, 10:29 pm

          And I would argue that, in more cases than many think, a liquid, diversified portfolio would actually provide more of a dividend than a paid-off residence, along with more flexibility, liquidity, and mobility.

          I am not discounting the idea of buying a residence – either with cash or with a mortgage at an interest rate lower than financial market returns – once one is FI or at least has a large enough ‘Stash to remain sufficiently liquid and diversified. I’m all for the no-rent dividend!

          Also, I disagree that rent is a 100% loss, and also feel that’s the basic misconception. For me, it’s a monthly expense, like utilities – albeit with some residual, even possibly appreciating value.

          If it made financial sense for me to use my current or future ‘Stash for a down payment – and I decided to disregard my non-financial reasons for not wanting to buy a residence – I likely would do so.

          I simply cannot see how, for most if not many people, having such a large percentage of my net worth in one illiquid, non-mobile asset is financially healthy.

          BTW At some point earlier this year, the following question occurred to me: If someone who is in the buy camp could stay in a home rent-free, would they? Meaning, sign a normal lease with no monthly rent payment. If the answer is “no”, then the person is basically not making the decision based on financial factors. Because if the answer is “yes”, then there is a price point that they consider rent more worthwhile than buying.

          Then, a little while later, the opposite side of the coin occurred to me: If I could buy a residence for $0, would I? Almost definitely. Meaning, there is some price point that would make buying a residence more worthwhile to me. That price point likely will increase the more FI I become.

          Reply

  • Genevieve Hawkins August 19, 2015, 4:28 pm

    Good analysis it always amazes me the costs from parking to heating to repairs to risking injury or death on the freeway through a lengthy commute that folks don’t consider. I lived in a gorgeous oceanfront view in heart of it all Venice Beach in LA the all-in costs were nowhere near what the crazy commuters were paying to live in the high desert 50 miles from their jobs one way, and that’s before factoring in roommates, no need for A/C with the perfect ocean breeze, or being walking distance from anything. It was hard to get an organic experience with our young daughter though–she was the only kid in the entire building and was much too young to wander freely on the Venice Beach boardwalk, so her social interactions were all playdates. And who says you can’t have a dog?

    Reply

  • Slater August 21, 2015, 7:43 am

    The interesting thing about this article is that no one makes the equity argument.
    The housing crash in the US was a bit of an anomaly if you look at historically.
    All I know is that we bought in 2005 b/c I was one of those people that believe “I’m not paying for someone else’s equity!” We bought our home, rented the back part out and made some tactical improvements and sold in October 2 years later for 25% more than we bought (including the investments we made). How can you get this type of return rent & investing? I dunno but I’ll stick with buy for now b/c it has worked for me. I don’t know many rich people who rent – in fact none.

    Reply

    • Robert August 21, 2015, 3:13 pm

      You happened to get very lucky Slater. What you did was buy a house and ride the housing market all the way up to the right point then exit the market and take your winnings. In your post you mention the housing crash was a bit of an anomaly, which would also make the 25% increase in that time frame an anomaly.

      It’s very hard to argue against the pride of ownership argument. That is a personal decision, not a financial one. The Buy versus rent debate is a very complex one so naturally there is no one size fits all solution.

      Reply

    • Jay A. August 21, 2015, 9:20 pm

      I second what Robert wrote, and I will add that the article refers us to the NY Times Rent vs. Buy calculator, which is based on the equity argument.

      In areas with a relatively low rent-to-purchase ratio (or relatively high purchase premium, to look at it that way), and assuming average market returns, over the long term and in more cases than many if not most people think, we actually come out ahead, equity-wise, by investing the down payment in securities and investing what we save by renting.

      Reply

  • Paul August 25, 2015, 10:39 pm

    There’s something you overlooked, having less to do with rent-vs-buy and more to do with commute-vs-downtown. Suburbs don’t surround you with nearly as many stimulating excuses to spend money. Since moving downtown from the suburbs, everywhere I look I see things I never knew I wanted. I have the discipline to resist, but in the suburbs I never even had to think about it. I am saving about five hours a week and a hundred dollars a month by not commuting to work, but I am paying for it with stir-craziness, since what used to be a walk down a bike trail is now a walk down a row of cafes.

    Reply

    • Michelle August 26, 2015, 4:25 pm

      Agree with this, even to the point of living out in the country. I love living out in the country, and I do save a lot of money by it being really difficult to get take out food for every day meals. If it were more convenient, I’d get a lot more take out food, rather than making something at home ;-) But irregardless, my decision to live in the country was not a financial one, but because I like it. But I aim to work from home part of the time, if not all the time, and coming into town for pretty much just grocery shopping and time with friends.

      Reply

  • Kim August 27, 2015, 9:42 am

    Just curious as I’m one of these dumb suburbanites (but am willing to learn), I often think I moved where I did and bought my house where I did not necessarily for the yard, but for the school district so I wouldn’t have to spend a fortune on Private Schools. Where I live the schools near the city are not the best. I wouldn’t mind living closer in, but then would have to spend what I save on private schools, in my opinion. What are your thoughts on this?

    Reply

  • Leigh September 17, 2015, 11:10 pm

    Hmmm…there was a time not too long ago when I would have agreed with this thinking for myself but…well…here’s what happened for me:

    My husband and I rented in Portland, Oregon for 20 years. We had two kids and a small dog. We had no desire to buy. We loved our carefree lifestyle as renters. Unfortunately, my spouse passed away from illness and I was a single mom suddenly….and I needed to think long and hard about the future. The kids and I were still very happy with the rental of a spacious 3-bedroom duplex in a fabulous neighborhood. I had zero desire to buy my own home. I too felt like it would cost more to own a home. I was set to live her for the next 20 years if I could.

    Well…that was then and this is now. Thank goodness I changed my mind.

    Like most renters in Portland, my rent skyrocketed by $400 in less than two years…and the rental market was so tight, it made no sense to even try to find another place. There wasn’t anything available anyway unless I wanted to move the three of us into a 1-bedroom cracker box. No thanks. I had to pull my daughter out of dance classes and I had to cut down on some other things I considered extra and unnecessary perhaps, but more “quality of life” expenses…but I hated that I had to do this. We also really wanted a second dog. We love animals and this was really important to us. My son wanted to get involved with dog training and he wanted to experience training a puppy. But we were only allowed one dog under 15 pounds….yada yada yada. I was tired of living by someone else’s rules. I wanted to decide the fate of where I live, what I pay, and what I can or cannot do with my own property. I didn’t want to have to worry about another rent increase or the possibility that my landlord would not renew our lease and ask us to leave, for whatever reason. I would then have to scramble and fight for a new rental. I realized I wanted to be able to plan for the future and know what my house payment would be for the next 30 years. I was done living in so much uncertainty.

    I also realized very quickly that if I were to buy, my mortgage would be $450 less than my rent (including taxes and insurance). The only thing not included in this figure was unexpected repairs. Well..I was willing to live with that. I could see how the market was changing and I decided to take my share while I could. The value of homes here was/is only going up and it made me feel so good to know I would have something to leave for my children one day.

    So…I began my first home search ever and decided to buy in an up-and-coming neighborhood. We found a cute little 3-bedroom on a surprisingly large lot for Portland. It needed a little cosmetic work but had good bones, so to speak. I went from spending $1750 per month plus all utilities to $1300 per month…plus the same utilities as when I was a renter. In fact, since my new house had gas and my rental had been electric, I actually saved on utilities! I did have to pay my own garbage…but still not a problem. I was still ahead of the game.

    We LOVE our home. We have a yard and got that puppy without having to ask permission from anyone. Wow..that was huge to us! My teen son mows the lawn and he really enjoys that. One day, when he goes to college, I’ll pay a neighbor kid to do it. The house has a detached garage and I have a friend helping me transform it into a 1-bedroom living space that will become rental income within the next 6 months..so that will pay most of my mortgage. In fact, I already have a friend who wants to rent it, so that’s already in the works. Life is so much better since I decided to buy a home. The freedom, security, and contentment cannot be matched in any rental situation that I know of. Unless you can sign a 10-year-lease…..maybe. But it all depends on your priorities, I suppose. If I was single with no kids and didn’t have to worry about whether my rent was going to increase or that my landlord might decide to sell the place, perhaps I would feel differently. I guess as a single person, if you had to move into a studio apartment somewehre, that would be okay. But I guess I’m just past all that now. I’m 47…so maybe that explains my perspective? I don’t know. All I know is that we have been in this house for a little over a year and I the only extra expense I have had was replacing our washer and dryer. I ended up buying a refurbished set for $600 with a full one-year warranty. There are plenty of rentals that make you buy your own anyway..so not much different there either.

    I hope this sheds some light on another perspective! Cheers:)

    Reply

    • fleur-de-lis September 18, 2015, 3:24 pm

      Hello Leigh,

      Interesting story. I am not sure about US, but in Canada owners cannot raise a rent above 5% per year (and it never happens) in many cities, so this could be something to consider (I mean, rental regulations in your state/province).

      From your story: you changed neighborhood… This can be a really good decision, but is it really comparable to the house you were renting before? When we buy, obviously, we’re more open to comprise… what about the commuting costs? Did they increase?

      Also, there is a big chunk of information missing in your story… how much did you put upfront? I believe this is an essential part in the buying against renting decision. If you put a big part of your savings, well you are not investing anymore and this should be added to the cost.

      For the house expenses and repairs (I do not like to call them extra or unexpected, I expect them) I think you should add a safe 150S per month in your budget, even more if the house is old.
      And what about the hours your spending in the house working?

      As a renter (not single) I do not live in a studio and I am not worried about the rent going up (or my landlord selling): I have enough money (thanks also to a cheap rent) to deal with any situation with a smile on the face. Actually, I will be more worried to have a big mortgage to be honest.

      cheers

      Reply

  • Roy September 28, 2015, 9:44 am

    Hi MMM, I am stuck on the math with respect to your comment that this person could retire at age 37. At $11.00 an hour with $1200.00 rent, split with a roomie I get the following:

    $21,450.00 per year income
    $358.39 monthly income tax bill at 15% federal and 5% provincial
    $600.00 per month rent – half the total rent
    $345.80 left to invest at 50% of the left over amount of earned income

    In 10 years at 7% that is $59,012.85 in 20 years it is $175,100.05

    Either my Math is incorrect or I am missing some other piece of this puzzle. I don’t get how this person can hope to be “retiring from your job working at Starbucks by age 37.” I have read your other posts and your personal numbers seem more realistic to me. If one can save 4 grand a month at 7% that is $684,206.93 in 10 years. At 7% that provides just over 47 grand of income per year. I can see how one can retire on that. I do not get the idea that it is a ratio of savings to income. I think one would need at least $700,000.00 to retire on. Help me understand!

    Reply

    • Mr. Money Mustache October 6, 2015, 7:54 pm

      Hi Roy, my “age 37” calculation is just based on the shorthand calculation that living off of 50% of your take-home pay gets you to financial independence after 17 years – provided you can continue to live on that spending (inflation adjusted of course) after retirement:
      http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

      The thing I may have overlooked is Ontario’s tax rates, which I don’t follow closely. Here in the US, there is negligible tax on an income like that. You’re assuming a 20% overall tax rate. Aren’t the tax rates progressive there, with the first x dollars free from tax, then a slow phase-in of taxes with lots of kickbacks for low income people?

      Reply

      • Jack October 7, 2015, 5:58 am

        You don’t pay 20% tax in Ontario on 21k income. 20% is your marginal tax rate (what you will pay on additional income beyond 21k). The effective tax rate after maximum contribution (18%) to RRSP is 6.7%.

        Reply

      • higginst October 7, 2015, 11:09 am

        The tax rates are accurate but on low income, its complicated by the “Basic Personal amount,” tax credit which basically exempts the first $9670 (Provincially) and the first $11138 (Federally) from tax. So for $22,000 in income, the tax bill will be $2214 annually ($184.5 monthly), using this calculator at taxtips.ca,http://www.taxtips.ca/calculators/basic/basic-tax-calculator.htm

        However, this doesn’t include MSP (healthcare) premiums (if they’re not covered by your employer) or payroll taxes (Employment Insurance and Canada Pension Plan). EI and CPP will be 1.88% and 4.95% respectively.

        So, this gives net income of $22,000*(1-0.0495-0.0188)-2214= $18,283.40
        Less the rent: 18,283-7200 = 11083
        50%: $5541.5 annually or $461.79 monthly. This would have to cover all living expenses besides rent (doable but tight). Allowing you to retire in 17 years, providing you can continue to live on $461.79/month + $600 in rent.

        Reply

        • higginst October 7, 2015, 11:14 am

          Just as a follow up: the nest egg you’d be retiring on would b $180,156 at 7% annual return over 17 years. Again, not much, but if you can live on $1062/month, you don’t need much!

          Reply

        • Fleurdelis October 8, 2015, 5:14 am

          your calculations are correct,
          however you both do not consider tax credit: if you put around 6k p/y in your rrsp with a 21,540 income you would pay around 800 cad in taxes, not 2,214
          Moreover, Starbucks matches dollar by dollar your rrsp contribution up to 2%… this is an additiona 430 dollars in your rrsp per year. In 17 years, at 7% interest, it is 15k more.

          Reply

  • TJ G October 16, 2015, 6:56 am

    I was wondering if there are any readers with experience from the UK? I have looked but it seems that buying nearly always works out cheaper here. (Manchester to be precise).

    The difference in the UK is that taxes, bills, ground rent etc isn’t included in the rent, this adds on in my case an extra £300-£450 onto a rent of roughly £650p/m.

    Instead I could buy a flat for £130,000 and keep my repayments around £350-£400p/m which in my situation seems to be a no brainer for my monthly cash flow. Has anyone managed to rent successfully in the UK or is the rent vs buy argument purely regional?

    Reply

  • kjs December 8, 2015, 4:29 pm

    Pros and cons of Renting really do depend on where you live – as the North American example here yes it makes a lot of sense. As pointed out in other Countries the Tenant has little leverage and gets punted around from post to pillar! One thing i will say though is we all get older …sacrificing to purchase a home when youre younger and renting makes more sense really can pay dividends later on in life. You can livefrugally and easier in middle age with a good usuable asset than the possible stress of having to find rent money each month when youre old

    Reply

  • Daniel January 18, 2016, 8:09 pm

    Here in Europe, the trend is that big houses and apartments are proportionally rented for cheaper than small ones.
    So I cozy 540 square feet apartment in downtown could cost 400 € whereas a big 2/3 1500 apartment just 1 km from the other apartmenr could cost 550 €.

    I guess this is the trend everywhere and based on the same concept that make “family size meat packages” less expensive than smaller portion sizes.

    What many people don’t realize, when they claim that “renting is like throwing money away” is that by renting and saving the difference you would have spent on buying including interests and taxes, that makes a house costs twice or thrice its price when you buy through a mortgage, you could buy three houses in cash instead.

    I think part of the problem is that the mortgage just makes a better saver out of you, you just feel this suffucating urgency to make sure you have enough money for the mortgage and nothing is wasted. On the other hands renters are more likely to waste the extra money they save by not having a mortgage and paying an house twice+ its real value than saving them. If they were that prevident, they would realize in 30 years they will have the money to buy whatever house at a real price caompared to a 30 years mortgage that costed you more than twice the price of your house.

    The only exception is very low-price houses.
    I know a friends who bought a 40.000 € house that needed some fixing.
    The mortgage was 110 € monthly and he lived there while fixing things up.
    At the end he could seel the house for 110.000 but he went on rent again, nice condo flat for 380 € a month in the ain city square, no-car area, and saved and invested all the rest.

    Reply

  • SAra May 3, 2016, 10:56 am

    In Salt Lake City, where I live, most of the nice-but-not-luxurious neighborhoods in the city still sell at half the cost of rent in the area if you look at month-to-month mortgage/expenses. The main drawback is maintenance and taxes on that property. I personally have no interest in owning a suburban home at all. I’ll either own a condo or rent. It’s odd how big of a realization that is, and how controversial.

    Reply

  • matt July 14, 2016, 1:05 pm

    MMM — I generally agree with your logic, but I think you may be unintentionally overstating the costs associated with owning. When looking at the cost of owning i think it makes sense to deduct the portion of your mortgage payments that goes towards paying down principal. This portion of the payment is essentially going from one pocket into another (from cash in your bank account to home equity that you now own). I also think that you can deduct the portion of your interest expense that will come back to you in the form of tax savings (i.e. annual mortgage interest expense multiplied by your tax rate) as it’s basically a wash. I think these are fairly significant considerations when comparing owning and renting. Would be interested to get your thoughts. Thanks!

    Reply

    • Mr. Money Mustache July 14, 2016, 4:06 pm

      You are definitely right Matt – I always count only mortgage interest as a cost, not principal payments.

      As for interest deduction : yes, but only by the amount the mortgage puts you above the Standard Deduction. For most couples in average priced housing, this effect is negligible. The mortgage interest deduction is really a subsidy on higher incomes and house prices.

      Reply

  • marko July 20, 2016, 2:46 pm

    Seems like this argument is more about where you choose to live rather than rent v buying. You can usually buy an apartment in downtown areas…

    Reply

  • Tom July 26, 2016, 7:49 pm

    Location, location, location……all depends where you are….rent vs buy. I bought a small (725 sq feet) one bedroom condo in the very expensive Boston suburbs. I paid off a 30 year mortgage in 11 years. While I was still paying a mortgage even with the condo fee and taxes it was $600 dollars LESS per month than renting.

    Reply

  • Ravi August 10, 2016, 9:28 am

    I rent but one of the comment I always hear from my friend is you are wasting the rent by dumping into a bin. What are you getting in return while I am building the equity. He bought a 650K condo, 1 hr away from downtown but his commute is paid for by the company. I often get confused whether am making a mistake renting for $2k per month while houses cost around $800K – $1m. Logically doesn’t make sense to me to block all the money. Especially when I am being taught your house is never an asset.

    Reply

  • Tom Morrison August 20, 2016, 2:16 am

    I have read through a lot most of the comments above and found it really interesting,but I note that most people in favour of renting are in high rent / house price areas ,if you move out from the centre the figures change as investors move from looking for capital growth to income. I am only going to give examples of the figures from where I live as I know nothing as to the circumstances of other areas my area is northen Scotland

    Buy
    150 K at 2% 5 year fix £3K ,insurance/ maintenance £2 property tax is paid by owner or tenant so not included in calculation so cost of owning is £5 K / year if you are moving regular costs for selling and buying plus your time would not make this viable
    Rent
    600-650 a month no maintain cost but you still have to keep the garden gives a cost of £7200 a year almost 45 % more

    Build to rent or live in changes the figures even more towards owning by dropping the cost of construction to £1K per includes plans ,fees etc,square meter by managing the pricing and using good tradesmen against a cost of one stop company which would charge£1.6-£2K plus plans and fees per square meter as always the cost of the site site needs to be added
    Finally all the graphs I have ever seen show shares beating the price of property but only when dividends are reinvested but savings on rent or rent received are never added to the property graph who draws up these graphs do they have a interest in changing the results?
    looking forward to seeing the comments🙂

    Reply

  • AL September 4, 2016, 2:03 pm

    I live in the SF Bay Area. Bought house ~ 4 years ago for ~ 1 million paying 20% down. Let’s run the numbers.
    Mortgage: 3.5% fixed for 30 years
    Property Taxes: 1.25% (capped by prop 13 to low increases)
    Tax Rate: 40% (Federal + State)
    Effective cost: 4.75 * 0.6 = 2.85%
    Inflation: 4%
    If my property did not appreciate a dime, I am actually reducing my effective payment by ~ 4.00 – 2.85 = 1.15% per year because my mortgage remains fixed while the value of money depreciates 4% per year.
    If I was renting, inflation works the other way, it would cost me 4% more every year to rent.

    When you added opportunity cost of down payment, you also need to consider the fact that when I bought the house 80% of it was owned by the bank, but if it’s price appreciates, 100% of the appreciation is owned by me. Now consider that the value of the property went to 1.8 million today.
    My investment 200k my net equity not including principal payment part of mortgage payments ~ 1 million or 5x return.
    In the mean time the rent for my house when I bought it was ~ 2800 per month, today it will rent for ~ 5000 per month. Given that lease is almost always for 1 year, I could be expected to pay 5000 per month today which is way more than I would like to pay today.

    So which is better?

    Reply

    • Mr. Money Mustache September 8, 2016, 11:25 am

      Thanks Al, I appreciate the number-running.

      The thing is, you are still assuming 4% inflation and the house keeping up with it. In reality, we’ve had much lower inflation, and coastal California housing is known to go down as well as up. You happened to hit a good patch for home ownership because you started just after a record economic crash and have now ridden one of the country’s biggest booms in history.

      If you could have rented a place back at the start, kept a great relationship with the landlord, invested the downpayment, property taxes, maintenance and other expenses in the stock market, which has also roughly doubled in value during that period, you would have done pretty well too.

      Again, you have done very well for yourself, but the renter can easily come out ahead in areas with high housing prices relative to rents.

      Reply

      • LeroySF September 8, 2016, 1:44 pm

        I live in the Bay Area and am in a very similar situation to Al. I bought a house 5 years ago, which has since appreciated by 80-100%. I’m curious for your take on whether it would make financial sense to sell the house and rent a place, even if we have to stay in the same housing market and have pay obscenely expensive rent.

        My wife and I are trying to adopt a more Mustachean lifestyle and have recently considered selling the house (we’ve already cut a lot of other wasteful spending), but we can’t decide if that makes financial sense given that we’d end up potentially paying more in rent than we pay in monthly mortgage payments.

        Thanks,
        Leroy

        Reply

        • AL September 14, 2016, 9:25 pm

          California is a special snowflake due to prop 13. I would not sell unless you are expecting a housing market crash. If you sell you will lose at least 6% in commissions and closing. Then pay capital gains on any gains > 500k. Finally if you buy again your property taxes will readjust to 80 to 100 % higher. Rents in SF area are unreliable and can readjust dramatically higher every time you renew lease.

          Reply

      • AL September 10, 2016, 5:02 pm

        My mortgage, property taxes, insurance and maintenance is ~5.5k per month. Average rent over the period is 4.4k per month.
        Savings ~ 55k + 200k down payment. Even with doubling that is 500k. But I will concede that it was a good time to buy.
        Actual cost to me now though is ~ 4.5k per month going forward. The 5.5k includes one time upgrades after buying the house. Also it includes principal payments and does not include tax breaks.

        Reply

  • Brett Cairns September 19, 2016, 8:06 pm

    Reading this blog reminded me of the time that I spent in Toronto working on two separate occasions. During the second I worked in the middle of Toronto just south of the 401 and lived in Ajax. One winter I had a 3 hour commute one way that started at 6am. It also reminded me of how I finally realized that quality of life beats a high paying job in a city like Toronto any time and why I move to the West Coast. No not Vancouver – further West to Vancouver Island where scenery and people are great, quality of life excellent, weather is great and living is still affordable.

    Reply

  • John Gooch December 16, 2016, 12:17 am

    Don’t forget quality of life. As a long time renter, having shared walls has been a major inconvenience. Ever had a neighbor who tests their subwoofers at all the wrong hours? Want to throw a dance party of your own but are afraid of noise complaints? Welcome to apartment and condominium living! Having a single family home with no shared walls gives toy all kinds of freedom, not only noise but often with the look and feel of your home. Try expanding your home when there is already another home attached to yours.

    However, I bought a home in Colorado earlier this year and then landed my dream job in Seattle WA last week. Rent and real estate prices are both of our control there with 600 Sq ft anything choosing $2k month or $400k to buy . I’m moving adobe long term is the right thing to do, but I’ll likely rent for a year and then buy. The company I’ll be working for is international so I could easily see myself relocating in 2 years to another office in another country as well.

    Reply

  • tkid February 5, 2017, 12:11 am

    I’m not gonna tell you I’m one of those nitwits who commutes from Niagara Falls to the Eaton Centre every other weekday. Nope. But I do.

    Reply

  • Jack April 10, 2017, 10:25 pm

    What if you’re not starting from scratch?
    My wife and i “own” a home but have managed to rack up $75k in debt (CCs, student loans, car, etc). My wife’s source of income went away slowly over the last 1.5 years and we didn’t tighten things up… leading to large CC balances. Now we owe more monthly than we make and it’s not getting any better.
    We are at the point of a decision… sell the house and rent… or try consolidating our debt to make it a manageable payment. We refinanced the house last year to 3.875% for 30.
    If we sold the house, we could pay off everything and be back to debt free… which seems like a no brainer… emotionally.
    However, rent in our area costs more than owning a house (even factoring in reasonable maintenance costs).
    We have run the numbers and could rent and still save monthly, but the long term numbers (29 years…. left on mortgage) show more net worth by staying in the house.
    What do we need to consider in our rent vs buying scenario since we already have the house?

    Reply

  • AW May 10, 2017, 2:24 pm

    Very late to the party here- but as a double-income-no-kids (yet) couple, in tech, with an annual salary of ~$375k/year, we saved a bundle renting a “vintage” place in Boulder, CO until this month, where, despite the frothy real estate market, after 6mo of research, we found the perfect place (after a bit of DIY) for around $700k (or two year’s gross income).

    SHOCKING price tag, but in our 20’s – with a net worth of over the home price (I thought everyone bought a home worth less than their net worth?), 70% savings rate of our take-home pay annually, a low interest mortgage rate, zero debt, and an easy six-year payoff plan, we are very happy to spend the “extra” money to: 1 – sell one of our (commuter) cars, 2 – never drive again locally – the place is right downtown, 3 : shorten our (temporary) working commutes to under 10 miles – “easy” bikeability for us bike nerds, 4 : (maybe, if personal and market forces align) take advantage of selling it in a decade or so for a profit.

    The math for us favored renting for a long time, if we only looked at rent vs. mortgage. But, we took into account commutes, local lifestyle, sale (and permanent $$ savings!) of a vehicle, purchase price as a percent of annual income (2x ), and six months of real estate stalking. Lots of factors – in our old, huge tech city, we’d never ever buy!

    Love the blog.

    Reply

  • india just August 7, 2017, 9:17 am

    I published my returns on both the house and the education on my linkedin account, leansixsigmaengineer.

    There are some subtleties with the educational costs and returns that leave wiggle room for a positive return.

    The house was definitive, over 16 years, going from 227k to 505k, my returns were half the S&P500 and renting.

    Reply

  • Juan del Pueblo October 24, 2017, 12:41 pm

    People don’t factor in how valuable cost of opportunity is when deciding to rent or buy. 4 years ago I graduated college and entered the workforce full-time earning ~$50k. Thanks to 2 career moves which required me to move to different states I am earning $90k in my mid 20s while many of my peers are earning $70k on average. Lost salary increases from being tied to one city or state could add up to hundreds of thousands of dollars, possibly more than all you ever spent on rent in your lifetime.

    Furthermore, the renting deals you can find with 2-3 weeks of lurking craiglist are phenomenal. I rent a 20×16 master bedroom with 5 closets (1 walk-in), a huge bathroom with separate shower and tub, in the second floor of a house in a low crime residential area 10 mins driving from work, 20 min drive to the beach, and 10 min walking distance to nightlife area, all for just $1k a month which includes water, electricity and internet. A 1br/1br apartment in this area costs close to $300k and houses start at $600k.

    When it comes to buying a house, very rarely can you buy a house for a price significantly lower than the market dictates. When renting, many landlords don’t really know what the market value is and you can find amazing deals with dome effort.

    Reply

  • Susanne December 8, 2017, 3:45 pm

    For other late readers of this blog post: I absolutely agree that renting is the better option in most cases. The conclusion that all the traffic jams are purely optional is not correct. Why? Let us imagine what would happen if all these suburbians decided to listen to MMM and move into the city. Prices would go up 2x or more, perhaps even 4x, and then what? Be grateful that others take the worse deal and leave nice apartments for us.

    Reply

  • Inspector Clouseau March 6, 2018, 3:53 pm

    happened across this blog about 2 years ago and found it immensely refreshing. It got me taking a closer look, a much closer look, at all my spending and overall life decisions. I paid off student loans, got rid of cable, sold my car, cancelled my house cleaning, started going to Costco, et cetera…

    Most of these decisions were easy. But this one isn’t. I would love to get some feedback/advice from fellow Mustachians.

    Should I sell my house and buy a smaller one even though my property tax would double and current interest rates are way higher? MY current loan is for $480,000, and my house is probably worth $1,300,000. I have a 30 year loan. My property taxes are $7000. Total mortgage is $2980. It’s a 5 bedroom, 4 bath, woodshed, 2900 square foot house, on a double lot. I could turn the woodshed into a studio apartment and get $1200 for it. Wife not thrilled about having people living on property.

    Where I live I could buy a smaller, 3 bed/2 bath house for $950,000. If I sold my current house I could potentially put down $700,000 on a $950,000 house, leaving me with a $250,000 mortgage. But my property taxes would be $14,000, and my interest rate would go from 3.75 to 4.5. So my new mortgage would be $2400.

    Is it worth it? Doubling my property taxes and getting into a loan with a higher interest rate seems like I could be making a bad move.

    Lastly, we think about moving out of the area all of the time. We could pocket that $700,000, own a house outright in another state, and get to hang out with our 2 and 4 year olds, ride our bikes more often, et cetera.. The issue is that we are from the area, have family nearby, aging parents, and a community. It feels like home and
    we feel very conflicted about leaving it.

    Any thoughts/advice would be appreciated.

    Reply

  • Mark B May 6, 2019, 11:25 pm

    What if i plan to buy that 700k suburb house, but to put it on rent (real estate as investment), while I, instead, be living in the 2.3k rented apartment? I have a hard time deciding between investing in index funds or to get a real estate first (have none, and I live in the middle east, where house pricing is sky rocketing)

    Reply

    • Mr. Money Mustache May 7, 2019, 7:26 am

      In general it is good to think in terms of investing… but a $700k suburban house would almost never be a good choice as a rental, because the rent to price ratio would probably be very high. Smaller units like apartments in moderate cost areas usually work much better, and you can get 1% of the purchase price per month in rent. For the suburban house you would need to charge $7000 per month in rent to earn a similar return.

      Reply

  • Alex Ershov May 14, 2019, 2:55 am

    I’m new on this blog but would say in my case (I’m living in Perth, WA for the last 4 years and have a wee bit of non-western oriented background inherited from living in Russia for 28 years before) renting will always beat buying. Why? Because for the last three years I’ve built a successful business that literally able to pay off any renting cost for any dwelling within 5 km from CBD. So when you ask me what would I prefer for my family in a span of ten years 1. to have a mortgage and a house with an unpredictable selling cost (-32% on WA Property Market for the last four years) in a questionable suburb of the God’s forsaken city in the middle of nowhere or 2. equivalent sum of cash on my bank account, investments with no liabilities and growing business that could be run from anywhere in the world what do you think will I choose? Thanks for the article. The hardest job in the world, truly, is to teach people to be realistic in the time when mass-thinking prevails.

    Reply

    • Mr. Money Mustache May 14, 2019, 8:35 am

      Wow, have Perth housing prices really dropped that much in recent years? I remember hearing of nothing but their rapid expansion in the past. And I also used to harbor fantasies of living there, back in the day.

      Reply

  • Garmeon July 22, 2019, 9:06 pm

    Ever since I read about renting potentially being a better option than the traditional belief that you need to buy a home from Millennial Revolution’s and Mister Money Mustache’s blogs, I’ve been stressing out about our recent home purchase.

    Purchased our home for $665k. We live 5-10 minutes away from downtown San Jose. However, we need to get dropped off at the train station downtown to get to downtown Palo Alto for work. Total commute time is 50 minutes. Train fare costs $161 per month.

    We are also renting out one of our rooms for $1,500 a month.

    I just looked up the cost of a 2 BR/2 BA apartment near work and it costs $5,700 per month.

    Thoughts?

    Reply

    • Mr. Money Mustache July 23, 2019, 6:44 pm

      Good question! (I also received your email about this, by the way – thanks for sending it my way).

      In summary, you’re probably saving some money with your current strategy, especially with that $1500 rental income (nice work!) That is a HELL of a commute time, but at least it’s mostly not all in a car, so you can work and read during the train ride.

      In your situation, I’d focus on continuing to scope out the house and job market in case you ever get a chance to optimize it. And on saving and investing so that you can retire earlier and not commute at all :-)

      Reply

  • TunaFishTuesdays May 19, 2020, 10:22 am

    That video clip was terrifying: 37 seconds long and only one vehicle was moving – the train

    Reply

  • Mark Schreiner September 23, 2021, 4:25 pm

    All the analyses above fail to explicitly account for the number of people being housed. In other words, we should look at the total housing cost per year *per person*.

    This matters because as the number of household members increases, the cost per person for a given house (and equivalent rental unit) in a given location decreases. This is one reason why there is a move from renting to buying and from lower-quality to higher-quality as people marry and then as they have children. Homeowners may pay more total, but their total benefit (added up across all household members) more-than-compensates the higher costs.

    As others have already pointed out, another major factor is school quality. MMM pooh-poohs this, but (a) home schooling is not always easy, feasible, or advisable, and (b) School quality is largely determined by the effort/quality of five groups: (1) your student, (2) you yourself as your student’s parent, (3) teachers/admin, (4) other students’ parents, and (5) other students. In the United States, the quality/effort of these 5 groups are highly correlated with residential location, and so there are worse and better public schools when measured on quantitative outcomes. Despite what MMM suggests, differences across schools are not all due just to self-selection of the best students into the best schools, nor are the concerns of all parents like those in MMM’s child’s school, where the group of students/parents who some may fear will reduce school quality are new immigrants. School quality is also linked to current and historical racism via residential segregation, but the above holds even in homogeneous places where racism is presumably absent. Even if we ignore the argument above, very few people act as if all schools are just as good as all others, and that if not, then parents at home can make up the difference.

    Reply
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