Don't Buy Stay Renting...Thoughts?

Hi Folks,

I Just read this article
http://ezinearticles.com/index.php?D...hy!&id=1157441

"Renting is just plain better. It's better because it makes you richer"

He makes an argument for renting vs owning a home. (He obviously has a vested interest as he owns an apartment living site)

I have my thoughts, but I'm curious what you think.

Benefits:

- NO Debt ?

Thoughts?

Well, this could be a very opinionated reply but, having been on both sides of the equation at various times, I would prefer to have either a house in the country or an apartment with double walled construction...and permission to fix it up and paint/decorate as I choose. Ha, ha! Oh, well, dreaming is fun.

Anyone who tells you buying is always your best bet, needs to look around and see the wreckage currently. Sure, housing CAN keep pace with inflation and so on but it's not a sure thing, as we are seeing. If the price is right, the terms reasonable (and will stay affordable), the neighborhood is upper level, and you aren't prone to picking fights with your neighbors, go for it. Theoretically, you can always rent it out if things aren't to your liking eventually. Realistically, better not talk it up around or you'll get no takers.

Wait until the market is near or bottoming out if you're planning to buy so you can judge the trend in the area. Otherwise, look for desperate sellers and make the best deal you can for everyone.

Renting is a lot less work and expense over all but sometimes you pay for the convenience with numerous compromises you may not wish to make...like noisey neighbors or ones who cook Lute Fisk and other nasties like corned beef and cabbage every other week. Choose whatever is easiest for you to tolerate and live with...and good luck!

Sandi Bowman

[MMacGillivray]

A long time ago (I think early 1970s) when things were looking fairly prosperous in the UK, you could walk from one job to the next if you fancied a change, and life was good (yeah, the Good ol' Days), the maximum amount you could borrow for a mortgage was 2.5 - 3 x your annual salary. That kept the interest repayments in a fairly affordable bracket.

It horrifies me now when I see people borrowing 5 or 6 times annual salary - and expect to be able to meet their repayments when interest rates rise.

My advice would be to start SMALL - you can always trade up.

Margaret

I think that article is a stretch at best. Real Estate has appreciated better nationally than the stock market, so that argument is completely flawed.

the average return of investment on a house is ZERO!

I don't have a clue where the writer gets off making that kind of assertion. I have over 100k of equity (even in the current market) and almost everyone I know is in a similar position. Even if you buy a home, live in it for 2-3 years, and then sell it for the same price - you break even. You just lived in a home for that long for free - as opposed to paying a landlord several tens of thousands of dollars with nothing to show for it. The fact is real estate appreciates - unlike a car which loses value when you drive off the lot.

The people who bought at the peak of the housing market may be upside down, but the same could be said for those who buy stocks at the peak of a market. The biggest difference is that buying a home is investing someone elses money. I don't know anywhere you can get a $200,000 loan to buy stocks and play the market, but you get loan for a house and be practically guaranteed to have a big payoff over the long haul. And when you consider the taxes and interest are tax deductible, you have another huge advantage to renting.

I think his argument that a mortgage payment is so much higher than rent is flawed as well. Aside from the tax benefits that level the field considerably, there is also the cost of rent down the road to consider. The last time I lived in an apartment I was paying $400/month in rent. I thought my house payment of $600/month was high. When I sold that house to move into a new one, I was shocked to have to pay nearly $1000/month for short term rent until my house was finished. If I don't refi, my house payment will be the same in 20 years, even 28 years down the road (and I'll be almost fully paid off on a home that will be worth way more than when I bought it). If you rent, however, how much will you be paying 20 years from now?

I could go on, but I don't think that writer makes a very strong case for renting if you look at all the facts.

Maybe, just maybe, it's an okay time to buy a home if you have perfect credit, a huge lump of cash (I'm talking 10k+) to put down, and are willing to jump through all kinds of hurdles to get a loan...but that's just ridiculous.

There are a lot of FHA loans available right now that are extremely easy to qualify for and have incredibly low rates. Trying to convince people that it's not worth it to apply for a loan?!? That's an act of desperation on the part of someone who knows that his product is far inferior right now.

The only benefits to renting are amenities - and you will pay a very hefty price tag for them and have nothing to show when you move. Although, I suppose if I owned a rental property, I would try to put a positive spin on renting as well. I just don't think I could make the kind of outright bogus statements that guy made.

Todd Smith
www.homebargainsaz.com

Duane,

Thanks for asking about Renting V Buying.

Did you read my "3 Schools of Thought" post http://www.sowpub.com/forum/showthre...1176#post21176

Whichever option you choose you need to know WHY you have chosen that option. And then ACT on your Why.

It's no good to say, by renting I save govt taxes and repairs and maintenance and can invest the difference. But then you don't invest the difference and spend it on booze and smokes.

Likewise, it's no good to say, by buying I will own my home and not have living expenses later in life. But then keep upgrading your home and increasing your debt by either renovating - or - selling and buying bigger/better. Because you'll never own it.

If you buy your home, then it is wise to follow my three rules...

1: Buy in a Future Growth Area (rents will be higher compared to prices)
2: Do not borrow to your maximum capabilities - borrow less than you can afford.
3: Do not use All your deposit - keep some in reserve in case of little emergencies and have that Reserve fund invested, even in a term deposit, so you are making some money on it too.

I also have another Thing... Never Sell.

When you sell you lose money to the agent and then more money goes to the agent of the place you are buying.

A guy asked me at work today, how can people afford $450k homes. My reply was...

Two ways... one, you know those "first home buyer" ads you see. That's cause those homes are Cheaper and can be bought by a person with basic deposit. 10 years down the track they have equity and some principal paid off. So That equity and paid down is applied to the $450k home. So all they are doing is actually borrowing a bit more than they did years ago. OR, it takes two incomes - husband and wife work - to pay the loan repayment.

There was more... a tangent about also having two car loans and the child in day care and a house full of furniture bought on HP. But you get the idea.

Another guy at work who has his home on the market is going to buy a Bigger Home with a tad more land. Larger debt. Reckons he'll start investing in some property in five or so years time. My opinion... ain't gonna happen. Probably pop out another kid or two in five years time, or move again into a larger home with larger debt.

Renting pros... no debt, no repairs, no govt taxes, cheaper than buying.
Renting cons... rent increases, regular inspections by the agent, cannot decorate to your whim, no benefit from equity increases, never know if owner will sell - and knew owner not want tenants.

Buying cons... debt, more expensive than renting, repairs, govt taxes.
Buying pros... decorate to your whim, not bowing down to real estate agents and inspections, lock in repayment amount, equity increases accessible for investing or living purposes in retirement, can sublease to a boarder if want, can rent out garage if want, no chance of owner selling from under you.

Anyway... to sum up...

MOST people who rent because it's cheaper and Intend to invest the difference, won't invest. And if they do, they invest poorly and cannot generate the same return they'd have gotten from just buying instead.

MOST who buy with plans to pay off, do not pay off or even invest the equity wisely, but spend up instead.

If you can follow my three rules and also never sell and do IO loans, then buy. It's a tad more expensive than renting. But only for a few years. After which it is the same and then cheaper. With the added bonus of having excess to the equity.

Michael Ross

[Ankesh]

I also have another Thing... Never Sell.

Can you elaborate Michael? Thanks.

Ankesh,

Thanks for asking about the Never Sell.

Different countries might have slightly different rules on this. I don't know the rules of those countries so only go by what effects me in the country I live in. ok.

Down here it goes like this...

If you sell your primary residence - the place you call home - after living in it for 12 months, you are NOT subject to tax on any money you made. However, IF you sell within 12 months, then the Profit you made - difference between what you bought for and what you sell for - is subject to Capital Gains Tax (50% of the profit is added to your normal income - if you are allowed all the concessions - and you are taxed accordingly).

Investment property is subject to Capital Gains Tax regardless of when you sell it, when you bought or, or how the value increased (due to renovation or time or supply and demand).

So that property you bought for $100k which you sell for $220k has a $120k Capital Gain. 50% of that - $60k is added to your income for the year and subject to the relevant rate of tax for that income level - and there is a good chance it will be subject to the highest rate of 50%.. So you'll owe the Tax Man $30k.

Not only that, but when you sell you Also pay Real Estate Agent Commissions. In my state that is 5% of the first $18k and then 2.5% of the rest, PLUS 10% Goods and Services Tax. And for our example property, that $220k sale would probably cost around $6 in commissions.

So the sale loses you $36k.

Plus, you now do not have anything to make you money. You've just got the cash. And if you want to reinvest into property again, you'll be hit with... Land Tax and the Commission on the new place will be part of the sales price so you'll be paying that too. If the property is around the same value, you'll be hit with $5k land tax, another $6k in agent commission, plus loan stamp duty and the other BS costs of buying. Most likely it'll cost you $15k to buy.

So now you've lost/spent $51k to sell and buy.

If you never sell you can draw down the equity. Loans are NOT subject to tax. So of that $120k equity increase you can probably drawn down around $80k and not pay tax on it at all.

Plus, you still have a tenant who is paying the interest on that additional borrowing. So no money out of your pocket.

AND you still have a property which will go up over time and allow you to dip into the equity again at a later point. And at a later point, that $220k place will have doubled in price and be worth around $440k. And the available equity will probably be around $170k - an amount which, if taken out, will NOT be subject to tax. And you'll be right because the tenant is paying the interest and you still have an Assess which can go up in value.

So to sum it up... by never selling you can drawn down the equity and get your money - just like what happens when you sell - but you do NOT pay tax on it.

If you had a few properties you could draw down Some of the equity from a different property each year and basically live an income-tax free life as the rent the tenant pays covers tax on the rent plus interest on the loan.

BTW, somewhere on the archives Thomas Rice also did a rundown of Buy/Sell Stocks v Buy&Hold. Buy & Hold wins hands down.

Michael Ross

Michael,

With taxes like you've outlined, it's time to find a new country to call home.. If you want to own a home.

Pete

Pete,

Thanks for suggestion Offshore Living

My understanding of the US is... you Also pay tax on Capital Gain. However, if you do a Property Transfer - you'll be reinvesting the profit into more property within 12 months - you don't pay the tax on the Gain.

However, you will still be paying the usual selling and buying costs. Throwing away money you don't have to.

Michael Ross

If you sell your primary residence in the U.S. you do not pay any capital gains taxes if your gain is under $250,000. For a married couple the gain can be up to $500,000. If you make more than half a million you'll pay some taxes.
http://www.associatedcontent.com/art..._the_sale.html

You will still most likely be paying the 6% (+/- ) commissions when you use a Realtor to sell. Personally, I still think it's a better deal than paying fees, loads, commissions and taxes on income for other investments such as stocks and mutual funds (although I have a few of those in my IRA - gotta have some diversity :-)).

Todd Smith