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Comma Guest
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Posted: Wed May 16, 2007 3:13 pm GMT Post subject: Why Rent, to get rich |
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The obvious problem with the analysis here is the assumption it is based on, that people who buy 300k dollar homes, have that 300k dollars to do what they wish with. However, that’s not true, and less true today than in days past. In days past most individuals had 20% for a down payment aka 60k. Today it is common to have less of a down payment. The real question is - - is it better for the average American who is barely making it, to put 1200 toward rent and not invest in the stock market (thus “throwing the money down the drain”), or is it better to put that 1200 toward a mortgage and (assuming the author is correct in his analysis) get a 0% return and not invest in the stock market. The answer is obvious. Furthermore, I find the more logical explanation for a possible bump in renting by high income earning individuals is more likely due to second homes, vacation rentals, etc. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Wed May 16, 2007 3:34 pm GMT Post subject: |
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Note: For the benefit of others, I believe this thread's author was referring to the article Why rent? To get richer which was recently posted to the news section. I'd like to add the ability to directly comment on news items like this at some point in the future.
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is it better for the average American who is barely making it, to put 1200 toward rent and not invest in the stock market (thus “throwing the money down the drain”), or is it better to put that 1200 toward a mortgage and (assuming the author is correct in his analysis) get a 0% return and not invest in the stock market. The answer is obvious.
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How is the answer obvious without additional details? A mortgage payment of $1,200 will not get you an equivalent place as $1,200 in rent. I'll assume that you didn't mean to imply that $1,200 would cover the full mortgage, in which case the answer can be that renting is obviously better if the total mortgage payment is high enough. For instance, say that the mortgage interest by itself was $1,500, after factoring in any tax benefits. In that case, renting would be more cost effective, even before you account for property taxes, maintenance, insurance, etc. You would be paying $300 more per month to rent the money from the bank as opposed to just renting the property directly.
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Comma Guest
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Posted: Wed May 16, 2007 3:57 pm GMT Post subject: |
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Yes, but the total amount of equity you have built in the property after 1 year is hypothetically 12k (I realize I'm being loose with the numbers). The costs associated with the mtg (like insur., taxes, etc.) should be subtracted from this number. So as long as the costs aren't equal to or more than 12k, you have "built equity" by "buying" a home. If you rent at the same cost you have lost all 12k and built no equity. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Wed May 16, 2007 4:25 pm GMT Post subject: |
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Quote: | The costs associated with the mtg (like insur., taxes, etc.) should be subtracted from this number. So as long as the costs aren't equal to or more than 12k, you have "built equity" by "buying" a home. |
Yes, but interest payments on the mortgage are in fact a cost as well. Paying mortgage interest doesn't build equity, only the portion of the mortgage payment applied to the principal builds equity. In my hypothetical example, the $1,500 wasn't the full mortgage payment, just the portion that goes to interest.
To make the numbers easy, let's say that the full mortgage payment is $2,500 (this is totally hypothetical). $1,500 of that goes to interest, and $1,000 goes to equity. Compare that to spending the same amount per month while renting: $1,200 would go to rent and $1,300 would go to equity in an asset class of your choice (the article recommends stocks, but that is up to you).
Here's another way to think about it - what if you bought a home using an interest only loan? You wouldn't be building any equity, correct? Traditional loans are like the interest only loans, except you pay a little extra so the principal gets reduced and you build equity - it is only this extra amount which you should be counting in your comparison. So, if monthly payments on an interest only loan are higher than what rent would be for an equivalent place, then renting is cheaper.
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Guest
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Posted: Thu May 17, 2007 3:46 pm GMT Post subject: |
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"To make the numbers easy, let's say that the full mortgage payment is $2,500 (this is totally hypothetical). $1,500 of that goes to interest, and $1,000 goes to equity. Compare that to spending the same amount per month while renting: $1,200 would go to rent and $1,300 would go to equity in an asset class of your choice (the article recommends stocks, but that is up to you). "
In that example, you are putting 1,000 toward equity and therefore building equity. Furthermore, the % of interest being paid decreases over time, and thus equity being built will increase over time as well.
In addition, your hypothetical suggests that you can rent housing for 1200 that a mtg payment costs are equal to 2500. Using a loan calculator on realtor.com, with a 5k down payment and assuming that there is an additional 6k in other expenses (which I find highly unlikely, at least initially) the total amount borrowed is about 340k for a mortgage payment of 2k.
I just looked up on realtor.com and found a newly rehabed place with 3 bdrms and a 1100 sq ft in Jamaica Plain near the pond for 330k (asking price). As I have been looking for a rental in and around Boston for the past year (partly out of need and partly out of real estate interest in general) and I would be shocked to find a 3 bed room in JP for 1200. More likely 1800-2100. (I'm not saying that it's right, it's highly overpriced both rentals and sales). But it just shows that a potential renter won't have 1300 in saved income to invest, if they rent, at least not in and around Boston.
"Here's another way to think about it - what if you bought a home using an interest only loan? "
Of course in an interest only loan, no principal is being paid off and therefore no equity is being built and my arguement does not apply. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu May 17, 2007 4:28 pm GMT Post subject: |
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Quote: | In that example, you are putting 1,000 toward equity and therefore building equity. |
Yes, but my point was that you could build even more equity if you used the same $2,500 per month to rent, at least in some scenarios.
Quote: | Furthermore, the % of interest being paid decreases over time, and thus equity being built will increase over time as well. |
That is true.
Quote: | In addition, your hypothetical suggests that you can rent housing for 1200 that a mtg payment costs are equal to 2500. |
Yes, I realize that this probably doesn't reflect actual prices. My point was that these are numbers which would make renting more financially advantageous, just to demonstrate that your original assertion that buying is always better for average people does not apply in at least some scenarios. Do you agree on that point? If so, the question then becomes at what price-to-rent ratio does the financial analysis switch from favoring buying to favoring renting (that's rhetorical, unless you feel particularly motivated)? If that isn't obvious, then it isn't obvious that buying is necessarily better.
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As I have been looking for a rental in and around Boston for the past year (partly out of need and partly out of real estate interest in general) and I would be shocked to find a 3 bed room in JP for 1200. More likely 1800-2100.
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OK, so $1,200 rent for JP may not apply and there may be a $600 ~ $900 differential with my completely made up example, but what are the condo fees, taxes, and maintenance on the equivalent properties you were looking at? Just $301 per month would put renting ahead again. Of course, there are many other factors that would need to be considered in a proper comparison, but my main point is that buying is not the obvious winner.
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Comma Guest
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Posted: Fri May 18, 2007 1:50 pm GMT Post subject: |
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I agree with, yes in some situations it may be beneficial to rent rather than buy. However, I think as a "truism" it doesn't work. Far more often it is better to buy than rent. But maybe I just misunderstood the point of the article, that it MAY sometimes be better to rent. |
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