Economics of Renting vs. Owning

T

The Kin2

I built a little model which analyzes renting vs. owning from different investment standpoint.

All the variable from property taxes to inflation, utilities to discount rate, mortgage interest tax savings to possible depreciation, and everything inbetween are included.

The results are very interesting. Even as a huge beleiver in home ownership, the results caught me by suprise.

When it comes to the renting vs. home ownership debate, there is no question which one is better. Even with minor depreciation, a home owner is still going to come up with a positive npv in the long run.
 
Most people, including many on this board cannot make 10-percent a year in their investment/trading account, on the long run. Fact of life. For those people real estate is REAL (no pun intended) and the only investment they will ever make and not lose their ass!
The greatest kicker is for owner/builders (must live in the house for as little) and rehabbers upon selling the home their gains are tax protected - try that with your stock account from interactive brokers!
This is why most wealth in the USA and for sure in CA is from Real Estate and not from market speculation. Just my 2 cents....
 
<i>When it comes to the renting vs. home ownership debate, there is no question which one is better. Even with minor depreciation, a home owner is still going to come up with a positive npv in the long run.</i>

By making an absolute statement, you are absolutely wrong.

If you say that ownership is usually better, I would agree with you. But not always. It only takes a single counterexample to prove you wrong. I am living in a counterexample.

Today I am renting a house for about half the risk free rate. That is the prevailing market in my neighborhood. There is no financial model on God's green earth that justifies buying a house under those circumstances.

Specifically I am renting a house for a gross cap rate of 3.36%, or about 2.3% net of property taxes and association fees.

Even with the mortgage interest deduction, there is nowhere you can rent money for less than 2.3%. And if you want to tie up your own capital for a 2.3% return, you're no Elite Trader.

Martin
 
^ California is not typical at all.

I ran the model with average home prices ($100,000 to $300,000) with rent comprables dervived at 0.9% of the home value. ($1800 on $200,000 home). Even with 2% annual depreciation, it still is better off in the long run providing significant leverage is used.

Obviously if a home is valued at $1,000,000 and it rents for $5000, it's much better to rent.


Also those Cap rates are ridiculous. I've never seen anything like that before. You're not pulling my leg are you?
 
It all depends on what number you plug into your model for "inflation". The official govt CPI number is 2-3%. But if you believe that then there are some bridges for sale.... In reality, there are 50% more dollars in circulation now than there were 6 years ago. The rent vs own argument depends on whose numbers you believe.
 
Does you numbers include that fact that as a tenant it is the landlords responibility to pay for any home repairs, whereas as a homeowner, you are responsible for paying for the repairs?

I noticed that here is Europe, particularly France and Germany, over 60% of the population rent their property. Interesting fact :D
 
Quote from The Kin2:
California is not typical at all.
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True. And if you had said, "a <i>typical</i> home owner is still going to come up with a positive npv in the long run," I would have agreed. But a great many Americans live in areas that are now historically atypical, which is why people are talking about housing bubbles. And most of the housing wealth in the US is concentrated in those areas.

I ran the model with average home prices ($100,000 to $300,000) with rent comprables dervived at 0.9% of the home value. ($1800 on $200,000 home).
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I don't think 0.9% is realistic for any but a handful of metro areas right now. Although there are certainly places where houses can be purchased that cheaply relative to rent, I think they represent a very small proportion of the value weighted housing stock in the US.

In any case, by choosing a 10.8% gross cap rate your conclusion is foregone. You don't need a spreadsheet to know that's going to be a profitable investment.

Obviously if a home is valued at $1,000,000 and it rents for $5000, it's much better to rent.
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I'm renting a house worth over $800k (Zillow says $825k) for $2300 a month. This isn't a particularly good deal compared to current advertised rents in my area.

Martin
 
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