Owning VS Renting: Houses, Cars, Appliances..... (long sorry :)) - Page 4

[VisionaryMom]

Originally Posted by Logan 

If you save as much as you can (after paying rent) and save up over many years you reach a point where the interest on the savings is actually enough to live off. 

This scenario is true only if you're paying significantly lower in rent than in mortgage, and you have rent control. The increase in the costs of homeownership - i.e. property taxes and insurance - are something that will be passed on to the renter. If I'm renting to you, and my taxes go up, so does your rent. A lot of your assumptions seem to work off of the idea that a rent is stagnant and low while a mortgage is high and variable. I know mortgages are different everywhere (in Canada, all mortgages reset after a certain time, iirc), but in the US, that's not the case. Our mortgage will stay the same for the entire length of the loan. It will be paid off when we're 56 if we don't prepay, which we plan to begin in the next few years.

Our insurance and taxes combined are less than $2,000 a year. We do pay $275 more per month than when we rented, though we have a larger home and yard now. I calculated a 5% return (which I know is low but trusty) assuming that we put in $3,300 (275*12) annually until we're 56. I then assumed a 5% growth rate through 34 years (or until we're 90). We would make $13,539.77 annually from that money. Will that be enough to live on until 2070? Rent here is low - $600-$700 for a basic 2BR apartment. If that number stayed pretty steady, we'd be able to pay rent from our interest. If we look at a historical calculation, however, something that cost $600 30 years ago would cost $1700 today based on inflation. Under that likely scenario, then no, we wouldn't be able to continue to pay rent until we're 90 simply by saving the difference between renting and owning (nevermind things we can do to add savings by owning, such as deducting interest, installing energy efficient appliances, windows, etc.). I don't see how your calculations showed that was possible in 10 years unless there's a massive difference in rental prices vs. mortgage prices.

Another piece to consider that likely informs many people's views is that in middle-class America, passing on the primary residence often is the largest part of one's children's inheritance. If people don't accumulate anything else, the idea is that they will pay off their house. Their children then can sell the house and keep that money. Our house was built in 1938. A couple bought it then for $12,000. Their heirs sold it in 2002 for $90,000. With no mortgage on the property any longer, they made out really well. Now, I understand that some people don't care about giving their children an inheritance, but I think that's an indirect factor in owning for many people.
 

[Sharlla]

oh I forgot to mention that we did get 5250 back with the first time home buyers credit.  so it really drops the price of our house to 47250

[TiredX2]

Originally Posted by traceface 

But, I don't see why you think renting automatically means you retire with no savings! Where I live in Northern California, it would cost more per month to own than to rent. So if I rent, but put aside the difference between rent and what a hypothetical mortgage would be, in a safe investment earning say 5%/ a year, I should end up with a chunk a cash in retirement that is equivalent to whatever the house (I didn't buy) would've been worth. No?

To me, it seems like the advantage of a mortgage is just forced savings. If you are disciplined enough to rent (for less) and carefully invest the difference, you will have the $$ in your old age to rent a place. The homeowner will probably be dealing with selling their too-big house that they raised their kids in and trying to figure out a new situation.

The only reason to buy in that situation is if you are under the (now proven mistaken) belief that prices will go up indefinately.  When I was looking at some places in Northern California I also couldn't understand buying *unless* you knew 100% positively that you wanted to live there the rest of your life.  I think looking at your house as primarily an investment instead of as housing has caused a lot of people a lot of financial trouble.
 

Originally Posted by Logan 

Out of curiosity I have been mucking around with compound calculators. 

If you save as much as you can (after paying rent) and save up over many years you reach a point where the interest on the savings is actually enough to live off. As you get more and more interest each year you are slowly able to increase the amount of payments you are making a well and truly cover rent costs and more. So when I was doing the calculations, after 10-12 years I would have had enough to live off the interest alone. And then because I would still be making contributions every week and they could be quite high (given that my living costs were taken care of) the savings and the interest were still increasing by quite a lot each year. In contrast, I *maybe* could have managed to pay out the mortgage on the home in that time, but more likely it would take twice that time. At which point I would still be paying rates, insurance and other household costs. In contrast to living off the interest of an ever-growing and pretty sizable nest egg that would actually be able to support me so I wouldn't have to work. Maybe I'm missing something? As I'm pretty new to the whole world of finances. But seems to me that owning and not paying rent is not as good as having your own income stream salary that pays for rent and everything else and at the end of it all leaves you a lot of money in case circumstances change and you do decide to buy. Which you could then afford to do outright and still have plenty of savings to earn interest on. Hope that made sense 

This only works if your rent is less than your housing.  If I had rented the same house that I bought it would have been approximately $400 MORE a month and I would have paid a higher federal tax rate.  In the long run, for the vast majority of homes in the United States it has been cheaper to own versus rent (assuming you do not have a rent controlled situation).

So, I ran a few numbers.  A $165000 mortgage at 6% for 30 years would cost approximatelly $1000/month.  Assuming rent started the same as buying, but went up at only 3% a year at the end of 30 years when the mortgage went to $0 the rent would be over $2300/month.  Over the course of that 30 years you would have actually paid 50% more (total) to rent than to buy. The owner would have paid 2/3 the total amount AND have an assett worth $388K (assuming appreciation of 3% yearly).

 Even if the rent is cheaper, the owner sitll generally comes out ahead.  If rent started at HALF the price ($500/month) by the end of 30 years you would have paid about 80% as much as the homeowner.  If, for the first 24 years, when rent was cheaper than the mortgage you invested all of the "extra", you would have to be getting over 7% every year, after taxes to come close to the vallue of the house.  And starting at that 24 years, the owning family would suddenly have "extra" and starting after 30 years they would have a LOT extra (because you would still be paying rent while they would be done paying off the home).

Now, there are a lot of situations when it doesn't make sense to buy a house.  When it is *much* more expensive to buy then rent.  When you are going to be moving within a few years (traditional wisdom says that buying isn't worth it if you won't be in a place for at least 5-7 years).  But, in general, home ownership is both a hedge against inflation AND a relatively safe investment.

[Logan]

I used the rate 6.01% because that is a fairly standard interest rate on general savings accounts here. If you shop around for the best rate, the best one I found was 6.45% but was a special 'first six months' deal. Whereas the 6.01% is a steady guaranteed one with my particular bank. There are a few a tiny bit higher at a fixed rate, but for the tiny difference (like 0.01%) I would rather stay with my current bank. But if you were really into maximizing profits you could get really hands on with your money management I guess and just keep transferring and taking your money where the best interest was. Also my bank offers term deposits (where you invest that savings for a set amount of time) and those interest rates are much higher. The longer you invest them for the higher the rate. I believe it was 7.01% for 12 months. I feel that at first those having a regular savings account where I can see the money, add in more each fortnight (you can't add to the term deposits) and be able to withdraw whenever needed with no fees is a better option for us. But when (if!) we ever reach the point where we were living off the interest for a year, then I could see the term deposits being the better option probably. I'm pretty much clueless about where to start with things like the stock-market and other unpredictable investments. 

Originally Posted by MovingMomma 

-these days it's very hard to find an interest rate on savings that beats inflation, but perhaps your are assuming your fund is invested in the stock market at an average rate of return (I'm curious about what exact numbers you used)

-in our situation, we are spending less per month to buy than to rent an equivalent property. Plus we are saving and investing extra income.  So we're getting the best of both worlds!

Sorry what does the first point actually mean? What is inflation and why would I want to beat it? LOL  As I said I'm really new to the whole money management world! 

One thing I did wonder about is, if you weren't working and were living off the interest (or even if you were working) would you get taxed on the interest of your savings? And if so how high would you expect that to be?

On the second, that is a good point about saving after you pay off your home as well and still being able to build up savings. But I see the bonus of the savings (instead of home) as that you wouldn't have to work at all- ie. all your expenses would be covered and coming from that money- well eventually. But maybe its best to reach a point where a house would cost half of the savings (or less) so you can buy outright and still have a decent amount in interest coming and build it back up a lot faster. 

I love thinking about all this. It's amazing to think that with the right choices now, you could eventually end up with financial freedom. Something I always assumed was out of my reach! 
 

[Tjej]

Logan - You would like the book Rich Dad, Poor Dad.

Tjej

[VisionaryMom]

Originally Posted by Logan 
Sorry what does the first point actually mean? What is inflation and why would I want to beat it? LOL  As I said I'm really new to the whole money management world! 

Ah, okay. Inflation is the rate at which prices rise. In the US, at least, inflation used to be around 1% per year, meaning that something that cost you $100 this year would cost you $101.00 next year, $102.10 the next year, and so on.

In the 1960s, inflation started rising much faster than that, and all of a sudden, people's purchasing power (what they could buy with their income) fell.

If you can "beat" inflation, that means that your money is growing faster than the prices of goods are increasing. So if inflation in your area is at 2%, then you need to get a higher return (interest rate) than that for your money to help you buy more tomorrow than it does today.

All of your assumptions & calculations seem not to take inflation into account so that they're based on the price of the service (in this case, rent) being the same over time. A couple of posters have mentioned that a house is a "hedge against inflation," which basically means that you're locking in your housing costs at *today's* prices. There has never been a 30-year period without inflation, so if you keep your home, you're always coming out ahead over the term of your mortgage. In the short term, that's not always true (which is why many people in the US right now owe more on their homes than the assessed value). That still doesn't mean, though, that these people could necessarily rent for less because the landlord is still covering his/her mortgage on the property.

[Kyamo]

Originally Posted by Logan 

One thing I did wonder about is, if you weren't working and were living off the interest (or even if you were working) would you get taxed on the interest of your savings? And if so how high would you expect that to be?

Yes, that counts as income (at least in Canada it does), so you would be taxed on it. How much? Well, that depends on your total income (including from working), where you live, and many other details about your situation.

[monkey's mom]

Quote:

Originally Posted by Logan 

 But maybe its best to reach a point where a house would cost half of the savings (or less) so you can buy outright and still have a decent amount in interest coming and build it back up a lot faster. 

And then you might even put some money down on a second home, rent it out, and let someone else pay for it for you!
 

[crazyms]

I didn't read through the responses but it's better for me to own. As far as the car I live rurally so no public transport, no taxis, very limited carpooling if it's even possible. If I don't have a car I don't leave the house which is necessary at times. It helps that my husband is a mechanic so we buy used and he does all repairs. We do our own maintenance on a regular schedule including full tuneups to keep our vehicles running well. I drive a 98 model car that we bought for $2000 and repaired and tuned up with about $400 in parts. I'll have this one vehicle for years. It does cost money to keep but honestly we don't have much other choice. If we lived in a city it might be different.

For appliances again we live rurally so while I get the point of cost of appliance replacement it's not bad for us. A washer can last years. Our last one was bought used and we still had it for about 4 years before we sold it still running. Laundry mats here we can do 2 loads for about $6. Then we have to figure in the cost of fuel to get to/from the mat so add on another $5-10 what once a week? I'd much rather buy a washer than pay $20 or more a week to do laundry.

Housing is very expensive but depending on what you are comfortable with can be done a lot cheaper than most people do it. Renting isn't a good option in our area since rentals are very limited in the decent schools. The rentals you can find are mostly in dangerous neighborhoods with a dangerous school district. Not an option for us. Then you have to consider moving costs if for some reason you have/need to move from the rental can easily run $2-3000 for a move. Yikes. I like the security of owning my own home as well. The security isn't as great when you have things financed but we try to avoid financing. Maintenance costs vary greatly as well. I'm shocked at the prices some people have to pay for home repairs. We live in a low COL area though so repairs are cheaper than most areas and we do what we can ourselves. We actually know plenty of other contractors and laborers that can do all the work we can't so we can get all our maintenance done very cheaply. That helps. I'd much rather own than rent.

[Coconut Chronicles]

Originally Posted by Logan 

Ideally someone would be able to save the entire cost of the house before buying- I know personally I will never buy unless I can manage just that. But I also know I will most likely never buy because of this. And how long would it take to save the entirety of a whole house??

Haven't read through the entire thread yet... We purchased our home outright 2 1/2 years ago. We were able to do this based on a few factors (the largest of which I think was just sheer dumb luck). DH and I were married 4 1/2 years before we decided to get pregnant. For the majority of that time we rented a small flat on a friends property for ridiculously cheap ($250 a month). Our friends were older and needed help keeping up with their property which was large so we bartered. We were a dual income household during those years but we lived like poor college students and pocketed my entire paycheck for almost 5 years. Then the housing market burst. Our home was a foreclosure in a great neighborhood (even with our amount of savings we would have had a sizeable mortgage if we had tried to purchase it at the height of the market.) So that's how we were able to buy outright. Of course this would taken us much, much longer if we had had DS, had lived in a high cost area during the first part of our marriage (we bought in a high cost area), made less money, had any unforseen health crisis etc. Dumb luck/great timing. Taking all that into consideration owning has worked out great for us.

[sparkprincess]

For us, right now, we want to rent. We live outside of St. Louis and the housing bubble was big here. We built a house right as the bubble was bursting. We spent $275k and then dropped $20k into if for landscaping. Not too smart. The housing market has decreased significantly here and experts say it will continue to decrease by 10%to25% over the next several years. Add to that the fact that food and clothing prices are rising and the instability (I believe ) of the US dollar, and we don't like where we are at. After just 4 years, we'll be thrilled to sell our house for $245-250K. We want to be on some land so our house is on the market and we are taking money out of retirement to pay the difference. This makes sense for us because renting here is less than half the cost of our mortgage (even for a house of comparable size!!). We'll be able to save $1k, per month. We plan on renting and saving for 2-3 years until we have enough money to put a sizable chunk down on some land and build a small house.

I think owning can work for you if you save up a good down payment, if you have an emergency fund, if you truly have enough money to pay the mortgage and the upkeep, and you plan on staying in one spot for a while. Otherwise, you could be setting yourself up for trouble. Just my two cents.

[velochic]

Originally Posted by Logan 

I used the rate 6.01% because that is a fairly standard interest rate on general savings accounts here. If you shop around for the best rate, the best one I found was 6.45% but was a special 'first six months' deal.
 

WHERE THE F*** DO YOU LIVE??  (Sorry to yell :)... but I really mean that.)  I have never seen a savings rate of 6%.  Never.  In about 25 years of saving and investing (those are rates that would be typical for investing, which carry risk... never for savings.  Never.)  If that really existed, people would just put there money there and not look back.  I honestly don't believe it exists and you are confused.

Are  you not sure that it's .601%

And no offense, but if you don't even know what inflation is, I'm not inclined to believe 6% interest on savings.  Actually there isn't a bank that can afford to do that.  I'm not trying to be belligerent, but I don't want others to think these are realistic returns.  They're not.

[MissinNYC]

Yeah, 6 % right now is crazy talk. No banks around here are offering more than 1-1.5 %, and that's on a high yield account with a minimum of 2500.  Check those numbers again.

[Sharlla]

maybe she meant .6%

[Logan]

Here is the savings account for the bank I am with...

https://www.anz.com/personal/accounts/savings%2Daccounts/progress%2Dsaver/

Here is a list of Aussie accounts....

http://www.savingsaccountfinder.com.au/

They all say 6.00% something with the points after the 6, so if Im as stupid as you seem to think, maybe I just don't know how it works??? I live in Australia.

[Sharlla]

I dont think anyone was implying that you are stupid, just wondering where you were from that an interest rate for a saving account was 6%.  here the national average is .66%

[Logan]

The implication was that I was too stupid about finance to know what I was talking about, I don't care, I probably am  Its been known to happen....

[velochic]

Nobody implied you were "stupid".  Just misinformed.  And you are, actually.  I checked the link.  First of all, you are in Australia and most everyone here is in N. America, so that was a bad assumption on my part.  I apologize for that.  However, that rate is a "bonus", not the annual yield on the savings account.  The annual yield is under 1%, as many here suspected.  You need to read the fine print.  There just isn't any way that a bank, anywhere, can afford to offer 6% sustained annual yield.  When you look at their other rates they are offering, those numbers make more sense.  And it makes sense that they offer this bonus as an incentive, though, to attract depositors.  It's important when dealing with finances to read the fine print and understand the transaction... these little games that banks play is what gets a lot of people in trouble.  I can see somebody withdrawing their investments to open one of these accounts thinking that their returns are going to be a few points higher... only to then figure out that this is just a sign-on incentive and they just made a bad financial move.  Full disclosure is so important!

[Logan]

The bonus is paid if you make a payment every month. Still not sure how that makes it null? Most of the savings accounts here do something similar. The top one on that link I provided offers 6.01% then a bonus 0.50% if you organize $200 or more in deposits each month. Many others have similar offers for regular contributions.

[velochic]

Originally Posted by Logan 

The bonus is paid if you make a payment every month. Still not sure how that makes it null? Most of the savings accounts here do something similar. The top one on that link I provided offers 6.01% then a bonus 0.50% if you organize $200 or more in deposits each month. Many others have similar offers for regular contributions.

It doesn't make it null... it's a teaser rate.  It's not sustainable.  I realize that the Reserve Bank's cash rate in Australia is much higher than the equivalent here in the US, but 6% is the bonus rate you are seeing.  Tread carefully and read the fine print.  That's what I'm saying.