[fsckboy]

>its not even the buying vs renting thing, renting is bad, you don't get to own anything at the end of the journey

let's say you are an investor (crypto and day trading, living at home rent free in your parents' basement: "more tendies mom!")

but alongside your crypto and day trading, you scrape together enough cash to buy a house as an investment. it's an investment, you rent it out and earn rental income. What's rent? let's say it's $10,000 a month. Great! so, in addition to the appreciation of the property over time, you also get $120,000+ a year (the + is because you get some of the money at the beginning and middle of the year and you can pour it into lucrative day trading and crypto)

with me so far? nothing up my sleeve.

now you're feeling flush and you figure with your success, you don't have to live in mom's basement any more. Heck! you own a house, you can live there! and eat your cheetos in the the living room instead of the basement! So, you move in.

If you live in the investment house you own, you no longer get the $120,000+ a year. Why...why...why, wait, it's just like you are paying $10,000 a month rent!

Moral to the story: owning does not save you from paying rent, you are still paying rent, forgoing that income on your investment. Yes, that "it's so obvious everbody knows it" personal finance advice you read in major publications is complete and utter garbage.

don't thank me [tips cap] glad to help. And now you know how i feel sharing the planet with people, "experts" even, who don't have a clue what they are talking about.

[manuelmoreale]

Is this sarcasm? Because this entire story is predicated on the fact that while you’re renting the home you bought you’re living somewhere else and that somewhere else is either something you’re renting or something someone else has bought and you’re living in there rent free.

[ralferoo]

I don't think it's sarcasm, just poorly explained. Owning a house serves two distinct purposes - as a home or as an investment. Despite what a lot of people think, it can't be both at once.

As an investment, you forego some upfront capital (downpayment), have some monthly costs (mortgage payment) and a monthly income (rent) and at the end you have an asset (current value) and maybe an obligation to pay another lump sum (principal - downpayment if interest only mortgage).

In the UK at least, for buy-to-let properties, the interest-only mortgage is common, so at the end of the mortgage term you have to repay the principal, and the profit comes from the different between the current value and the principal. In most situations, the rental income is almost entirely used to cover the mortgage payments, maintenance, costs, and paying tax, so during the mortgage period most landlords actually make very little income. It's essentially a bet on whether over the term (maybe 20 years), the difference in value will be better than the lost opportunity cost of not investing the downpayment elsewhere and the risk of periods of having to cover the mortgage and expenses without income during periods when the house is unoccupied, or tenants refuse to pay, etc. Particularly in the early years, the rental income may be substantially lower than the costs to the landlord, but over time, inflation will allow rental prices to increase but the mortgage costs will remain level. A smart landlord will invest the monthly profit at that point, to reduce the impact of the principal at the end of the mortgage.

In some ways, a house bought as a home is very similar, but in others very different. Typically bought as a home, a mortgage will be higher because the aim is usually to pay off all the principal as well as interest, and the simplistic view is that obviously having a mortgage for your home is better because you're always paying off the capital and end up with an asset at the end, the GP's point is that it isn't actually that simple.

Let's say you lived in the house. You're paying for the mortgage directly, let's assume that on average the mortgage costs are the same as the rent for an equivalent house, but actually at the start, the mortgage is probably going to be a significantly bigger chunk of your monthly expenses. On top of that, you have all the maintenance costs - some will be urgent and necessary, others can be deferred for later (although financially, perhaps not the best option because inflation will make the cost more or less the same now as later).

If you had the same house as a buy-to-rent property, you'd have the same maintenance costs and the same mortgage costs (whether it's interest only or capital repayment, the main difference is just when you pay it), so really the only difference is that you are receiving a rental income and losing the ability to live in the house.

As such, there is actually an equivalence between having a mortgage on a house that you live in and paying rent for that house instead - and the equivalent amount is the amount that you would have received as rent (minus taxes and costs from renting). If you could have rented that property out at £1000 per month, by choosing to live there, you are effectively paying that £1000 a month rent yourself.

In truth, the main factor in choosing whether to rent or get a mortgage is a mixture of availability and cost of credit (which varies depending on your financial situation) and how much you have available to spend on accommodation each month. Having a mortgage front-loads the payments - having a much higher payments initially, but fixed so that as inflation reduces the monthly cost in real terms, much cheaper later on, compared to renting where there is effectively a constant monthly cost in real terms once inflation is applied to it (probably annually, every time the price is renegotiated).

Personally, I'd chose a mortgage, because I was chose a cheap house compared to the area so that I was able to afford the monthly payment (the base mortgage was approximately 50% more than the equivalent rent would have been), and then used every bit of spare money I had each month to overpay, which meant that I paid off the house before the end of the mortgage term.

You might think that paying off the mortgage is an obvious success - I now own a house I can live in rent-free, but the alternative - paying much less each month and investing the rest, with compounding gains would probably be returning me an income that's equivalent to the rent that I would be continuing to pay if I didn't have a house.

Which one is better is down to personal preference, and also quite heavily influenced by societal norms - in the UK and USA, we're very strong believers in owning property, but in much of Europe, the vast majority of people rent and see no problem with that.

[fsckboy]

it's not poorly explained, it's poorly understood (to paraphrase Mr Miyagi, "no bad teacher, only bad students") This is like the Monty Hall problem and I am Vos Savant. Just listen and learn.

Part of the value of a house is the value of living in it, the rent. It costs to live in a house, and the amount it costs is the rent. And this is true whether you own the house or if somebody else owns the house.

Living in a house you own vs renting out the house you own decreases your net inbound cash flow by the amount of the rent; rent is paid, even if it is your house.

this is very basic economics, very basic finance, but, as understood by somebody smarter than all of you, who has kindly taken the time to explain it. You are welcome.

(Consider living in a house that you do not own, and paying the rent. Now, marry your landlord. What has changed? Answer: nothing, the rent you now save is also income the couple has now lost.

(you will need to make adjustments for depreciation allowance for investment property, tax deductibility of expenses, etc. but that's details, not conceptual. Do you suspect that these line items actually could make the difference between this being a wash vs a no-brainer money machine? they don't. If tax deductions make landlordship more (or less) advantageous, then the market will shift landlords⇔tenants till a new equilibrium is achieved where the rents and deductions balance out, with people living in all the same places. no value was created or destroyed, except less govt interference in markets is better, dead weight losses and all that))

[gnarlynarwhal42]

You are completely ignoring equity

[ralferoo]

Equity isn't relevant to the argument, that's why.

The argument is simply that by living in a house yourself, you are effectively paying rent on that property at the same rate that the house could be rented out if you were not living on it.

Any equity gain in the property itself isn't relevant to the rental value discussion, rather the separate transaction between you and the bank, whereby they lend you money up front to buy an asset and the terms by which you repay that money and the capital gains on that asset in the mean time.

The potential rental income of a property may be similar to the value of the mortgage payments, but generally won't be over the lifetime of the mortgage. As I stated 2 posts up, the cost of a mortgage is front loaded, so the price you pay on a mortgage at the start is generally more than the equivalent rental price would be for the same house, and towards the latter stages of the mortgage it will be much lower, because the monthly mortgage payments are still the same but the real-world cost of those payments has decreased due to inflation.

The simple point is that any time you choose to live in a property, you are either paying rent for the privilege of doing so, or you are missing out on the rental income from someone else who could be paying you to live there instead.