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Renting doesn't "throw money away"
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PostPosted: Wed Aug 17, 2005 3:23 pm GMT    Post subject: Renting doesn't "throw money away" Reply with quote

One common misconception that makes people want to buy a home is that renting is "just throwing many away". Presumably, this is because the money is permanently consumed and can't be recovered via resale. However, the same thing applies to a large proportion of what you pay when you buy a place. You could just as easily consider the following money that is "thrown away":

1) Mortgage interest payments.

2) Property taxes.

3) Property maintenance and depreciation.

4) Utilities that usually come included if you rent, such as water, sewage, and trash.

5) Insurance.

6) Inspection fees.

7) Realtors fees.

8) The difference in cost between renting and buying which could be invested in something with better returns. This includes the down payment which should provide substantial returns give its size.

9) Closing costs.

There are probably some other expenses as well - that was just off the top of my head. I posted most of this on Craigslist in response to someone who was under the misunderstanding that renting throws money away with the implication that owning does not (and somebody subsequently reposted it in another thread where it was also relevant).

Of course, there are those on the board who think (or at least state) that it is always better to buy. Their main argument in response was basically that the unrecoverable expenses of owning are tax deductible. While that may be true if you are in the right tax bracket and don't get hit with the Alternative Minimum Tax, the fact of the matter is that just because you can deduct it doesn't mean that it is free - you could typically save 25 cents for every dollar you spend on such expenses via reduced taxes, which means that the vast majority of the money is still "thrown away".

A user named 'doctour' was kind enough to offer a point by point rebuttal of all of the arguments that were presented to counter my list of expenses that are unique to owning: http://forums.boston.craigslist.org/ret/?forumID=6&ID=31574136

At the end of the day, when you go to move you are left with a house if you have purchased and you are left with a pile of cash/investments if you have rented and saved the difference. To truly answer which option throws more money away, you must determine which leaves you with the lower value in the end. The Economist did exactly this and they concluded that renting leaves you with more in the long term (given today's prices) even if you assume that housing prices actually increase:

http://www.economist.com/finance/displayStory.cfm?story_id=3722894

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Sesamebabe
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PostPosted: Sat Dec 24, 2005 12:14 am GMT    Post subject: I have to agree on this post... Reply with quote

I am a 28 year old semi-newlywed (married 4 years) and my husband and I have dreams of settling in Watertown in a single family to raise a family. But of course to our dismay, there is nothing within our comfortable price range. We currently rent a beautifully renovated 2 Bedroom apartment, love our neighborhood and our neighbors and if we had a little "surprise" we could probably get by for a few years. But anything that we would truly want to live in (and would be big enough to stay in to raise a family) is just so far out of our reach it is downright depressing! When I started figuring out the numbers with renting verses -owning, it really did make sense for us to just keep renting until 1) there is a huge crash and young people who want to start family's can actually afford to get into the market 2) we move out of state. When mortagage payments are going to be 3 times the rent and you could only afford a small piece of crap that you know you would only be able to stay in for a max of 5 - 8 years, the chance of truly getting a return on that (or even breaking even for that matter) are pretty slim. And so the young professionals who want to start families like us, stay in limbo waiting for greener pasteurs or they move out of state - and that is where the crisis will start to come in...
I know better to get in over my head with a 5/1 ARM, I feel sorry for those who got into them. The foreclosures are what will possibly help us out in the end, and from what I understand, the numbers are most likely higher then what are reported because banks do everything in tehir power to stay away from "officially" listing a home as foreclosed upon (via newly negotiated mortgage payments, etc.). I don't have a timeline for when the bubble will burst -but history and economics do not lie, it really is just a matter of time. This is what keeps my dreams and hopes alive!
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john p
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PostPosted: Mon Feb 20, 2006 12:17 am GMT    Post subject: i feel your pain Reply with quote

I feel your pain. Most of the "starter" homes in this area are the capes that were built for the G.I.'s after WWII. Then there are the Campanille ranches of the early 70's. When you take a look at what you can get in other states with new construction there is no comparison. Oh, I forgot to mention the glamorous "condos". Who's going to pay for all the lawsuits of these condominium association infighting that will clearly happen. Massachusetts doesn't offer as much for young families. I think there will be a big migration of retired baby boomers to warmer climates soon. The ones that leave sooner will get the best deals in selling their homes. Once the market gets flooded with inventory prices here will drop. We were the only state to lose population last year. I can't stand walking through a house of someone in the "me" generation who hasn't kept up with any maintenance and is trying to get top dollar so that they can retire comfortably in Florida. Why should our generation pay for the laziness and greed of some in the prior one. This high cost of living will hurt our competitive advantage here and it makes me wonder about the prospects of higher salaries in the future and "growing" into my mortgage. it's like paying top dollar for one of those cheezy old amusement parks when you know you can get more modern rollercoasters somewhere else. I think you've got legitimate issues and I hope you see the market correct so you can find the right opportunity in Watertown.
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Tesla
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PostPosted: Tue Feb 28, 2006 1:24 pm GMT    Post subject: Reply with quote

Sesamebabe - I feel your pain! I'm 26, married, and I have a son. I'm OK with renting... for the moment. Renting is definitely a better deal for now (I think rents are a bit high, too). I never really paid attention to the housing market until a few years ago. Since then I have watched in disbelief as prices have climbed higher and higher. I was disgusted when prices started hitting $400,000 and up for average looking starter homes. Now it's comical. I keep telling my wife that prices have to drop soon. A traditional lender criteria for an affordable house is that it should be priced at most 3-4 times the buyer's annual income. By this measure "average" homes in the Boston area should be priced at $250,000 or so.
I keep hearing about how town planning boards are favoring senior citizen friendly housing over housing aimed at families. If things don't change this area is going to have 5 walkers for every stroller. If home prices don't drop substantially within 2 years or so we're getting the hell out of the Boston area. I have a feeling that there will be some good bargains available after the crash... that is, if the fallout doesn't nuke my job.
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Economics
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PostPosted: Tue Feb 28, 2006 9:38 pm GMT    Post subject: Rent vs. Buy Reply with quote

Does anyone have any data on Boston area rental costs? The general rule of thumb I have heard is that if the cost to buy a house is less than 200 times the monthly rental on a comparable location, it is a good time to buy. If the cost to buy is greater than 200 times rental, it is a good time to rent. A quick scan of rentals suggests Boston area prices would need to come down over 20-30% to favor buying.

I would be curious if anyone has any data, analysis or thoughts on the validity of this approach.

Thanks in advance!
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john p
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PostPosted: Wed Mar 01, 2006 4:21 pm GMT    Post subject: rentals feedback and home values in Boston Reply with quote

I am paying $1250 for an unheated modern and large 2 bedrom about 12.5 miles west of downtown Boston. Using the 20 times figure, I would say that you're pretty close in the market being 20 to 30 percent overpriced because if this unit were to be a condo, it could go for upwards of $350k or so.

The big question is "Is it worth it?" What would $350 get me elsewhere? Being young it's fun to get out, go to dinner, the beach, mountainbike, etc. It's great to not have to worry about cutting the lawn fixing the leak on the roof etc. I think what is missing in your quick test analysis is that in newer cities, condominiums are designed to be mini communities. The units themselves have a more open flow and better layout. Some developments have tennis courts, swimming pools, the parking lots are designed for the real number of cars needed etc. They usually cost significantly less, so you get to have more fine dinners and can afford to travel more. In Boston, you get converted run down triple deckers or tired two and three families where the tiny back yards get turned into parking lots. You hear car alarms going off instead of crickets and if you hear noise down by where you keep your trash can, it's more likely a person picking out the recycled cans than it would be a racoon. It's sad because if you look at historical pictures of some of these neighborhoods they were once very charming and beautiful. When people fled the cities in the 70's and then with rent control for so many years, the quality went way down and housing wasn't an attractive investment. The upkeep of these buildings went way down and many aren't insulated properly. Beautiful Queen Anne, Victorian, Shingle Style, and Craftsman style homes fell victim to aluminum and vinyl siding and brickmaster.

The feeling of being young and getting into the real estate market here in Boston is like being on an airline flight, having the air conditioning break and having the flight attendants charge $50 for fans. Someone before you poorly planned, ran down the quality from what they were given, and is trying to overcharge you so that they can exit the stage and retire elsewhere. If I weren't rooted here with family, I would strongly consider moving to where my efforts gave me a better life. Further, the pace here is so fast, we work so many long hours and I waste so much time in traffic that it is hard to find time to even make the rounds and see the family. It is hard to stomach rewarding a slum lord or a selfish deadbeat.

Bottom line is, did I work this hard and give up so much to live in a run down property? We have friends our age who live in Cincinnati, Atlanta and Richmond Virginia and they don't have the degrees we have, paid the premiums for the colleges that we paid, don't work nearly as many hours that we do, don't have to sit in traffic like we do, and they can live in beautiful new 3,500 s.f. homes in new developments. They think they are successful and rich. We look at ourselves like "what are we doing wrong?" I showed a person what a $600k house looked like in some nice parts around Boston and he showed me what a $300k house looked like in some nice parts around Richmond (not very far off). Their salaries aren't that much lower than ours either. So when you look at quality of home and the quality of life that surrounds it, if you're willing to relocate, Boston is really 2 times plus overpriced. Think I'm kidding, look at a $900k house in Hingham, and take a look at what $900k can get you in metro Houston. Seriously, go to Realtor.com and look it up..... Oh, ask the guy from Houston what his oil bill was. When you tell him what you paid, he'll most likely say "thanks for the cash buddy".
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PostPosted: Wed Mar 01, 2006 6:04 pm GMT    Post subject: Renting and loving it Reply with quote

Renting is the only way to go in the over heated Northeast Markets - sold in 2002 and been a renter for 3-4 years. The landlord does the shoveling, cuts the lawn, pays the property tax increases, and fixes everthing. What is down side??

Meanwhile our cash generates more cash - no risk becaue its parked in US Treasury I-Bonds. If the US Dollar begins a big slide it can be moved quickly.

Too many people are making financial decisions like their Parents did - You are not your Parents - and you need to be more sophisticated. Too many of my friends have 60-80% of their Wealth tied up in an old or new house. If you have no pension you cannot rely on selling your House to fund your Retirement - and for too many this is their plan.

Rents are flat and meanwhile home owners are getting hit with Property Tax increases every year. Cash is King - there are no brokers or Lawyers or selling involved to access our money if we have to move.
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CJ
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PostPosted: Thu Mar 02, 2006 2:03 am GMT    Post subject: Boston is expensive, but worth it Reply with quote

Boston is very expensive and in some parts the triple deckers are run down. Boston is also undoubtably a bubble market, and will see price declines of who knows what (5%-30%). Currently my wife and I are renting because we get more for our money than buying. If we were to buy our apt instead of rent, our monthly cost would be almost $1000 more!

With that said, you could move to Cincinatti or Richmond or Atlanta or any of those "newer" Red State cities and get more for your money. But guess what, you would be living in a lame city with limited culture and boring people. You could buy a huge McMansion and commute 1.5 hrs on a crowded Atlanta superhighway in your SUV with the AC on, but is that really that great? Would you really want to go out to eat in Richmond and get your tires slashed? Would you really rather root for the Bengals and eat Cincinatti chili, or root for the Red Sox and eat in the North End?

Bottom line is that you could get more house in one of those lame cities, but Boston is worth it even if you have to rent!
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john p
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PostPosted: Thu Mar 02, 2006 6:11 pm GMT    Post subject: don't remind me C.J. Reply with quote

I was just at Mike's Pasteries in the North End yesterday. Their cannolis are so good they make your eyes roll back into the back of your head. Cincinnati's Skyline Chili is pretty dam good. I've been a diehard Red Sox and Patriots fan since I was kid. Red Sox Nation is pretty big, I think they almost get more Red Sox fans at the games when they play a Florida team. Boston totally has it's hooks into me so I do feel like a chained up gorilla that is just getting tarred and feathered by this local real estate bubble. Just because some things in Boston are truely amazing doesn't mean that we can be paddled on other things. Should we have to pay $50 for a beer at Fenway? At a certain point you need to step up and say that you're not going to be taken advantage of. I was recently in Richmond, Kentucky and I went to a crowded bar at 10:00 a.m. (morning) on a Saturday and ordered a Cape Codder. Not to my surprise, the bartender didn't know how to make it. I told her and to my surprise she gives me a stiff Cape Codder in a beer glass and charges me $2.

My big concern is that Boston could start to trend downward because of the generation preceding us. They got Boston when it was ripe and I'm not sure how committed they are to setting up a younger generation to the level that they were given. This generation was aptly named the "ME" generation. If our genration starts off house poor, we can't afford season tickets to the Red Sox or Patriots. There was so little forward thinking and planning that we need to live with this hardship of the higher cost of living. Think about how hard it is going to be for the echo-boomers to get starter homes here. The recent college graduates had to pay outrageous tuition fees and alot of them have serious student loan payments. These universities are raking in money, increasing their student population and are not providing housing for the students which completely throws off the balance in the local market. When Mayor Menino met with local business leaders this was one of the points that they highlighted. I don't see the salaries for entry level professional workers going up at the same rate as the tuition has, and with that burden to pay how on earth are they going to get into a starter home? It's getting to be really unreasonable and if too many people overextend it will affect all of us here. We need to exercise our right as consumers to demand more for our hard earned past, present and future earnings.
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Economics
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PostPosted: Fri Mar 03, 2006 3:00 am GMT    Post subject: Reply with quote

Thanks for your replies. Yes, I agree that even at 200 times monthly rent, prices are very high in Boston. Unfortunately, this is where my career is and I just want to get the most house possible and best neighborhood for my $s. No one is more frustrated than me about the prices in Boston!
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Economics
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PostPosted: Fri Mar 03, 2006 3:02 am GMT    Post subject: Reply with quote

Thanks for your replies. Yes, I agree that even at 200 times monthly rent, prices are very high in Boston. Unfortunately, this is where my career is and I just want to get the most house possible and best neighborhood for my $s. No one is more frustrated than me about the prices in Boston! At least at 200 times rent, mayber there is better potential for appreciation.
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PostPosted: Wed Mar 22, 2006 5:45 pm GMT    Post subject: Housing Price Rules-of-Thumb Reply with quote

To the poster who brought up rules of thumb for deciding when buying is worth it as well as everybody else who is interested, Patrick Killelea's blog has a discussion of this very topic today. See http://patrick.net/wp/?p=186 . Patrick is the guy who runs what is probably the most popular housing crash blog which is prefaced by a very well put together and through analysis of why real estate is currently overvalued and why the counterarguments are largely invalid.

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PostPosted: Fri Mar 31, 2006 9:52 pm GMT    Post subject: Renting Vs Buying Reply with quote

I woud agree that in this market, Renting is the best Option. The renstare low compared to sales and I can't beleive people would buy a multi-family where they can't rent it to pay the mortgage.
I was lucky I sold my two-family in that time and thought about renting. The one pice of the puzzle that I think people miss on the renting is that your don't own it, it's not the throwing the money out (Because as above I agree that you are doing the same with owning if the market is high) it's that you are not in control.
You have to move basically when the landlord tells you to (Becuase (s)he paid too much and can no longer afford it, or he is getting an offer of too much money and (s)he wants to sell.

So you have toi add that to your formula.
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PostPosted: Fri Mar 31, 2006 10:12 pm GMT    Post subject: Reply with quote

Quote:

The one pice of the puzzle that I think people miss on the renting is that your don't own it, it's not the throwing the money out (Because as above I agree that you are doing the same with owning if the market is high) it's that you are not in control.
You have to move basically when the landlord tells you to (Becuase (s)he paid too much and can no longer afford it, or he is getting an offer of too much money and (s)he wants to sell.


True, but that also works the other way. You can up and leave at will as well. If your job gets transferred or you have a surprise addition to your family and need more space, you have the flexibility to handle such situations, whereas trying to sell a home in a down market comes with the risk of not being able to find a buyer for an extended period of time. So for some people, the possibility of turnover in renting is actually a positive.

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PostPosted: Tue May 09, 2006 8:39 pm GMT    Post subject: Cash Reply with quote

"Guest" : that cash you have in T Bills has been losing value all along.
The interest you're getting MIGHT cover basic inflation, but the US Dollar has been deflated quite abit over the past few years (note: commodoties prices and the Euro, now worth 1.40 US) Real Estate is a "real" asset that absorbs inflation and has intrinsic value, and can generate income. When you buy a house with a fixed mortgage, your costs are much better contained than the typical rent situation. My parents were paying 100.00 a month for their
700 K house in Lexington.
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