Renting is now cheaper than owning in all of America’s 50 biggest metro areas

[BeExcellent]

Hmmmmmm. Interesting debate on this topic. Yes we all need shelter and shelter costs $$$. I own houses where renters live, and I rent where I personally reside. Why?

Well I am in the area I live in is for the sake of the best high school in my metro. The average house in that school district is over the 1M mark to purchase. I cannot justify dumping a big down payment into such a house, worrying about if the roof leaks or the HVAC fails and the high cost of debt service. Two summers ago the roof leaked AND the AC went out, total out of pocket cost to the owner? Around 30K. Glad the law requires the owner to fix those items and also glad it didn't come out of my pocket.

I only need this school district 3 more years. Then I'm an empty nester. I'd rather rent and then once my youngest graduates HS I'm free to go where ever my husband and I please. We also won't need a big house at that point, so to me purchasing a primary residence is unwise.

Unless.....I might consider manufactured housing in an over 55 community. Manufactured housing depreciates. You own the structure but you pay lot rent. I could buy into a place like that in several places, particularly near my favorite ski mountain, pay cash for the structure & lot rent forever but come out ahead AND be able to enjoy skiing daily or weekly. No brainer for me. And keep building wealth with the income I earn and the net worth I have. That is a perk being old has that is pretty cool actually. An inexpensive home base in that case & I could do that in a couple different areas that I like to frequent.

Warren Buffet has famously said that his home in Omaha, NE has been a horrendous investment even though he's been free & clear for years and the house is worth over 1M. Why does he hold that view?

Because had he invested that money he put into that house he'd have made at least 15M in the markets.

Primary residences are lousy investments. When renting is cheaper (as it is BY FAR in my metro)? You are better advised to rent & save/invest your money elsewhere.

As a renter you get the advantage of lower rent because the landlord bought under more favorable conditions and in the interest of getting a great tenant will pass those savings onto the well qualified renter.

Everybody wins. The renter gets a good place in an area where purchase is either cost prohibative or out of reach altogether; the landlord gets solid income, reduces vacancy loss and has the property occupied and performing.

I know a couple who live the good life in Orange County. They own 7 homes there free and clear, live in the smallest one and rent the others out at an average of 4K per month per house. Their monthly gross income is therefore 24K. Annual income is 288K or so. They bought those homes in the 1960s and early 70s and keep them up. Each home is worth over 1M. They are not billionaires but they do very well with that kind of passive income.

Real estate is a good inflation hedge and you can do well if you are willing to assume issues most homeowners looking for a primary residence will not.

To me a house is a glorified storage unit for your possessions that you happen to live in. Very different attitude than thinking a residence is a great investment. It actually is horrid as an imvestment vehicle. Just awful.

Rental real estate is a far better investment.

 

[Pierce Manhammer]

Rental real estate is a far better investment.

In our real estate markets, they are.

But in flyover country, it's often cheaper to pay a mortgage than to pay rent, even covering P&I. I could easily cover two mortgages in flyover country with what I pay for my upper-end apartment in the SF Bay area. There are many reasons I choose to rent instead of own right now. It suits my lifestyle to be able to control access to my front door, which is a big one. I'm also going to blast out of this metro in less than 5 years, given it's grossly overpriced homes it would take at least 5 years to be a net 0 investment as well.

 

[BeExcellent]

In our real estate markets, they are.

But in flyover country, it's often cheaper to pay a mortgage than to pay rent, even covering P&I. I could easily cover two mortgages in flyover country with what I pay for my upper-end apartment in the SF Bay area. There are many reasons I choose to rent instead of own right now. It suits my lifestyle to be able to control access to my front door, which is a big one. I'm also going to blast out of this metro in less than 5 years, given it's grossly overpriced homes it would take at least 5 years to be a net 0 investment as well.

My portfolio is in "flyover country". I bought for + cash flow but have also had some appreciation and right now I'm looking very smart having done that.

Problem in flyover country is that incomes remain low relative to cost of living. People don't have a down payment even if they could swing a mortgage in many cases. Most of my tenants are working class folk who may never save enough to buy a house. I've had some renters 10+ years. I keep the rents below market & maintain the houses. Those renters have retired my debt. And if something breaks? I have it repaired immediately.

Vacancies are bad. If you cruise along more than a decade with on time rents and without any vacancy loss? You're cooking with gas.

 

[jaygreenb]

Just my 2 cents, there are posters on here much more experienced and savvy when it comes to real estate than myself. If you are an experienced and disciplined investor you can certainly out pace any net returns on a personal residence plus not have all that liquidity tied up. The vast majority of people need to be saved from themselves though. A personal residence is essentially a forced savings where if they rented they would either not invest the difference in cost or they would make horrific investment decisions that would be a net negative.

 

[BeExcellent]

Just my 2 cents, there are posters on here much more experienced and savvy when it comes to real estate than myself. If you are an experienced and disciplined investor you can certainly out pace any net returns on a personal residence plus not have all that liquidity tied up. The vast majority of people need to be saved from themselves though. A personal residence is essentially a forced savings where if they rented they would either not invest the difference in cost or they would make horrific investment decisions that would be a net negative.

Agree 1000%.

 

[Reincarnated]

Just my 2 cents, there are posters on here much more experienced and savvy when it comes to real estate than myself. If you are an experienced and disciplined investor you can certainly out pace any net returns on a personal residence plus not have all that liquidity tied up. The vast majority of people need to be saved from themselves though. A personal residence is essentially a forced savings where if they rented they would either not invest the difference in cost or they would make horrific investment decisions that would be a net negative.

Bingo, this is an excellent way to look at it. Let's say for simplicity sake the net difference in total expenses month by month is 20% in favor of renting. I would imagine that for 90% of people almost all of that excess goes out the door each month. It cannot be understated the benefit of building equity in something (albeit often very slowly in the beginning for real estate). This may be an unpopular opinion to many, but I'd prefer to own a home that's a bit below my means/isn't extraordinary than to rent a place that may be more aesthetically pleasing. Once you get to the point that you have a decent equity position in your home, it's not like that value is necessarily locked up either, you can use that to your advantage in a number of ways.

 

[Scaramouche]

I built my first House from scratch in 1967,since then I have had maybe 16+ houses pass through my Hands...My Dad was a Carpenter with loads of gear and heaps of contacts and so I gradually learned the hands on skills involved...eventually I became a qualified Engineer,there were then no problems getting the licenses etc....My modus operandi was to buy established homes,the most run down home in a good street having a large block,with potential for either extension or dual occupancy...I didn't rent them out but rather set up groups of young malleable single Guys to rent rooms,as I worked night shift lecturing in Colleges I could then move a Caravan into the back yard and start either building extensions,renovating the house room by room,or building a second residence,often all three...I generally doubled my original outlay over maybe 2-3 years...Hard work,but enabled me to retire before fifty.

 

[jaygreenb]

Bingo, this is an excellent way to look at it. Let's say for simplicity sake the net difference in total expenses month by month is 20% in favor of renting. I would imagine that for 90% of people almost all of that excess goes out the door each month. It cannot be understated the benefit of building equity in something (albeit often very slowly in the beginning for real estate). This may be an unpopular opinion to many, but I'd prefer to own a home that's a bit below my means/isn't extraordinary than to rent a place that may be more aesthetically pleasing. Once you get to the point that you have a decent equity position in your home, it's not like that value is necessarily locked up either, you can use that to your advantage in a number of ways.

The problem with most people is access to debt has made them believe they can afford much more than they actually can. My personal opinion is if you can't save 20 percent plus of your income to invest or save, you can't afford the other expenditures in your life and need to downsize somewhere. If you ever really want to achieve some level of financial freedom would say that is the minimum. Like you, I have always lived pretty modestly, especially through my twenties and thirties. In my forties I have started to enjoy some of the fruits of my labor more but that was after building a strong foundation.

 

[jaygreenb]

I built my first House from scratch in 1967,since then I have had maybe 16+ houses pass through my Hands...My Dad was a Carpenter with loads of gear and heaps of contacts and so I gradually learned the hands on skills involved...eventually I became a qualified Engineer,there were then no problems getting the licenses etc....My modus operandi was to buy established homes,the most run down home in a good street having a large block,with potential for either extension or dual occupancy...I didn't rent them out but rather set up groups of young malleable single Guys to rent rooms,as I worked night shift lecturing in Colleges I could then move a Caravan into the back yard and start either building extensions,renovating the house room by room,or building a second residence,often all three...I generally doubled my original outlay over maybe 2-3 years...Hard work,but enabled me to retire before fifty.

Compounding effect of decades worth of consistent small good decisions. Well done.

 

[FlexpertHamilton]

Well yes, the value of buying a house is that you need a place to live no matter what.

This is more of a lifestyle debate than financial. But the freedom that renting provides is way more important to some people than the security of a permanent home...if anything, being anchored down like just guarantees you will be more inflexible. It only makes sense if you want a family or have a lot of job security.

Real estate investing is a different story but actually living in properties you own is a completely different discussion that has countless problems people refuse to address (such as sunk costs/opportunity costs).

 

[MatureDJ]

Yeah it was soooo much better for Gen X! We had it soooo easy…

It was this way all through the 90’s kids:

https://www.marketwatch.com/story/renting-is-now-cheaper-than-owning-in-all-of-americas-50-biggest-metro-areas-8cd4cd03

This is because the rental market is much more sensitive and dynamic to housing demand. And indeed, folks that had overpaid for the property and don't (can't?) sell at a loss need to get something out of their ownership (while they wait for demand to go back up) are putting those houses into the rental market.

 

[MatureDJ]

A home I purchased as a rent in 2017 for $200k is now work $515k and shoots off over 70k a year in rents. I think you are mistaken.

This would mean that you're getting like $7K/mo rent (i.e., the $70K would be after insurance & property tax, etc.). I don't see how such a property would be worth only $515K.

 

[MatureDJ]

When is the last time you saw a true half gallon of ice cream? Hell, now it is down under 1.5 quarts! Went from 2 quarts to 1.75 to 1.5 to 1.44. Pretty soon they are just gonna sell it in quarts.

Shrinkflation - Wikipedia

en.wikipedia.org

 

[MatureDJ]

Between the cost of houses themselves, the ridiculous down payments required in cash and the mortgage rates, I am not sure why anyone would think about purchasing a house right now

Actually, it could makes sense for anyone with cash - but yes, very little sense for anyone taking a mortgage. BTW, when I bought my first house in 1990, I was overjoyed that the 15-year interest rate had recently dropped to 9% (I refinanced down to 5.25% in the midst of the early '90s recession, and then down to 4% in the Y2K recession).

 

[MatureDJ]

Well yes, the value of buying a house is that you need a place to live no matter what.

I think folks have the take the attitude that they should buy a house in a very cheap locale (they are all over the place in old industrial towns), and either work online or take a suitably well-paying temporary job in another town, only renting month-to-month, and perhaps only renting a room from someone - IOW, only pay high-rent when working a job in a high-rent locale.

 

[MatureDJ]

Real estate investing is a different story but actually living in properties you own is a completely different discussion that has countless problems people refuse to address (such as sunk costs/opportunity costs).

Yes, if the rent is cheaper than the interest component of a mortgage (i.e., the principle part of the payment is actually like savings here), and that difference is put into a (tax-advantaged) retirement account, then renting could very well be the canny financial move.

 

[MatureDJ]

I am not taking about something bought at low interest rates in 2017 and low dollars.

I am talking about a house purchased today at high prices, with high interest rates and high inflation.

Inflation may help those who already own houses but it is definitely not helping new homeowners but houses.

Actually, the idea of housing inflation - if it truly is happening - allows for a small downpayment to leverage an asset that increasing in value, and thus the mortgage interest rate is actually a *real* interest rate of the nominal rate minus the inflation rate, and could very well be a very good investment. Of course, there is the issue of cash flow that could make this difficult.

 

[MatureDJ]

For starters, buying a home isn't exactly a walk in the park for everyone. In many cities, the cost of entry is so high that it might as well come with a "rich people only" sign. And let's not forget about those pesky little things called maintenance costs, which can turn your dream home into a money pit faster than you can say "HGTV renovation gone wrong."

A good home inspection can greatly eliminate this concern, but yes, cheap asphalt roofs only last so long.

And while it's true that owning a home can build equity over time, it's not exactly a guaranteed cash cow. The housing market is about as predictable as a coin flip, and there's always the risk of ending up underwater on your mortgage faster than you can say "housing bubble."

But a mortgage on an upside-down house is like any other debt in that a Chapter 7 bankruptcy can eliminate it (and savings can be shielded in that by socking away everything into a retirement account) - it's like a case of heads I win, tails I don't pay you back.

But hey, who needs diversification when you can dump all your hard-earned cash into a single asset and cross your fingers? Forget about stocks, bonds, or anything remotely sensible. We're all in on real estate, baby!

If the extra amount going into the mortgage vs. rental is a small portion of the overall savings, then it's OK - but yes, if someone is sinking every last dime into a house in an already high-cost housing market, then it's stupid.

Plus, renting offers the ultimate flexibility for those of us who aren't ready to settle down in one place or commit to a lifetime of DIY disasters.

Yes, if you're not ready to settle down, then it doesn't make sense. That said, if the house is relatively cheap and in an area that folks would like to have a 2nd home in, then it could make sense even if you're not ready to settle down.

 

[MatureDJ]

I can't imagine paying 2k per month for some crappy apartment when there's trash everywhere, people making noises at all hours of the night and early morning.

I remember dating a prude in SoCal for a little while, and the sound of the bedsprings in the unit above me left me with rage at that situation (I ghosted her before that was a thing, and she didn't seem to mind). I was having a hard time spinning plates then.

 

[RickTheToad]

This would mean that you're getting like $7K/mo rent (i.e., the $70K would be after insurance & property tax, etc.). I don't see how such a property would be worth only $515K.

About 6.2k in rent. I raise rents every year on all my rentals. I have little choice.