[kazinator]

> Myth 4: Renters throw cash away, at least owners build equity

It's no myth, because you have to live somewhere. (Well, you could put your money elsewhere, and go live in a cardboard box under a bridge, but let's be realistic.)

Owners are building equity with the money they would otherwise be completely throwing away on rent, and they got into that situation with just a little money down.

(Depending on area), current rents are in about the same ballpark as payments on a new mortgate, but: 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up. 2) only the interest portion of a mortgage payment is thrown away, and it goes down over time.

For the cost of the opportunity loss on your down payment, you're fixing the amount of a significant living expense that would otherwise continue to inflate, and you're getting a slice of that expense to go into equity that would otherwise be thrown out, and that slice gets bigger.

The opportunity cost on the down payment is not bad, if the property appreciates! You have to think in terms of leverage: if the property goes up by 80K, and the down payment was 80K, that's a 100% growth! You put in 80K, and it doubled. And your rent expense was replaced by something better. If you compared the leveraged view to the stock market, the stock market doesn't look so good. You can use leverage in the stock market also ("margin"), but that's a heck of a lot of risk.

I just renewed a mortgage for another term and the payment was supposed to go down (probably due to all the acceleration). Moreover, I declined that and kept it at the same amount. No way will a renter face a declining payment in the same area---not to mention that it would be irrational to refuse it.

[hhw]

Interest + Condo Fees + Home Repairs + Property Taxes + Property Transfer Taxes + Realtor Commissions are throwing cash away every bit as much as Rent.

Mortgage payments are likely to go up the same way that rent does, or even more so. Interest reflects inflationary costs, so the same upwards pressures on rents would result in higher interest rates. Except with interest rates at record lows, just a small increase in interest can wipe out an owner's equity while a small increase in rent (which is also controlled in many markets) isn't going to impact a renter nearly as much. Also, rent generally reflects incomes more specifically than inflation in general, and incomes have been increasing at a much slower rate than inflation for decades.

Debt leveraging is debt leveraging. Doing it on housing isn't automagically safer than doing it on financial investments. Yes, variance on an individual stock can be higher than real estate (also depends on the particular stock), but a sufficiently diversified portfolio can reduce the variance to be in line with real estate or to possibly be even more risk adverse. Not sure why people think debt leveraging is automagically safer with housing; it simply is not.

[kazinator]

Someone pays all these things if you rent, and you're foolish if you believe that it doesn't pass down to you.

[jarek]

Well yes, the fees are priced in. But in practice it is far from unheard for apartments to be rented for less than cost of mortgage if you were to buy today plus all fees. This can be influenced by the owner having bought a fair bit cheaper, or the owner counting on capital gains for the main income from the property, or the owner simply being unable to find a tenant that would pay more.

Ultimately the market decides the rent and landlords' cost is only one of the factors in the market price.

In Toronto and Vancouver condo markets it has been cheaper month-by-month to rent than to buy for a fair while. Which one will end up better 30 years down the line depends on a lot of future factors and is far from clear at the moment.

Incidentally, in 2011 I was offered lowered rent on my Toronto studio when I gave notice I would move out, in an attempt to get me to stay. I wanted to move out of the city so it was rational for me to refuse :D

(Sorry to see your posts downvoted, I upvoted you)

[kazinator]

Basically if it's cheaper for a renter to live in a place than for an owner to live there, then the owner must be coming up with the difference, thereby subsidizing the renter.

That is the basic condition that makes renting more attractive: can I rent a place for lower total monthly payments than buying a similar place in the same area.

That owner who doesn't live in the rented unit has to live somewhere else, and faces living costs there, on top of subsidizing the renter.

That situation can hardly persist for long; landlords may be willing to take it on the chin for a while (e.g. to get into the rental business), but not over the long term.

The rent will have to go up eventually to close the gap, or else the landlord will kick out the tenant and move in to save money. Or even sell the place (whereby the new owners may kick out the tenant).

[jarek]

> That situation can hardly persist for long

Something like 10 years and counting in Toronto. Markets can stay irrational for a long time.

> The rent will have to go up eventually to close the gap

Or, property purchase prices unable to be sustained by rent or buyers' income will fall.

[jarek]

> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate,

Not in Toronto, which is like the whole point

> 1) mortgage payments stay approximately the same over the life of the mortgage, whereas rents just go up and up

Condo fees go up and up

[TwiztidK]

>> (Depending on area), current rents are in about the same ballpark as payments on a new mortgate,

> Not in Toronto, which is like the whole point

Then what is the rent/mortgage situation in Toronto? That was never discussed in the article. In my area rent is 2-3x higher than a mortgage, all I know about Toronto is that property values are high.

[jarek]

The early-90s harbourfront towers by Bay and Queens Quay rent studios/1bds for $1500-1600 incl utilities or buy for $400-500k + maint fees $500-700/month + tax + util

[sanswork]

1+1 in the area at the moment will go for around $1800-1900/month. Based on two places I've rented in the Pinnacle centre over the past 3 years(and looking for places in that complex and ones near by).

[jarek]

In the battle of anecdotes, my entry is a studio in the upper third of 99 Harbour Square, 120 degree lake view to the east, rented in July 2014 for $1500 including all fees and utilities. Has it gone up a lot over the past year?

[sanswork]

I moved out of my last Toronto place a few months after that so I'm not 100% but I would say no given the rate of increases in the years before that I lived there. I can say that for a few hundred more a month you could almost certainly have a bedroom and a den pretty much across the street. Pinnacle has some of the better amenities in the area too.

[seivan]

Out of curiosity aren't condo fees based on the debt the condo coop has? In which it fluctuates based on current interests both on the loan as well as the condo fund?

[jarek]

Technically? Probably. In practice they depend a lot more based on the maintenance work that needs doing, and either increase as the building ages or the building standard is lowered. Most condo coops I'm aware of don't have an endowment fund.

[toomuchtodo]

> Condo fees go up and up

Indeed. As a building ages, you can be assured that the condo fee will go up with inflation.

[bello]

Not always. Sometimes renting might be a better deal than buying.

There are several factors which need to be taken into account, such as mortgage interest payments, opportunity cost of downpayment, property tax, tax deductions, property appreciation, etc. Khan Academy has an interesting video on this topic: https://www.khanacademy.org/economics-finance-domain/core-fi...

PS: Sure, if your property appreciates by a lot you'll make a large return. But what if it deprecates? People being overly optimistic about property appreciations were part of the reason/most affected by the housing bubble.

[kazinator]

> Sometimes renting might be a better deal than buying.

As a life-long strategy, or short-term only?

Buying isn't "sometimes". There is usually a commitment there. You'd never say, "renting isn't looking so good right now; I think I will buy for six or seven months and see how renting is looking then".

[icebraining]

You're forgetting the cost of being tied to a mortgage, in places where you can't just "walk away" from the property and have the debt released.

[mcdougle]

Disclaimer: I came to the comments first. I have not yet read the article.

From a purely mathematical perspective, it still depends on what your future plans are.

I purchased a property a couple of years ago, intending to live in it for a short period and then rent it out. I tracked all of the money that I've spent on the property, all of the money I've gained, and the general value (which I get from Zillow, although I know that's not necessarily accurate. If anything, though, the house is probably worth less than what Zillow says).

Note that this is a relatively new property (built in the 90s), which needed few improvements or fixes. So it's not like I've dumped thousands into renovations and so on, and it's not like a lot of expensive things broke with any kind of consistency. This is mortgage payments and basic home maintenance expenses I've tracked.

If I had sold the property within the first 1.5 years I'd still be out several thousand dollars despite the property's value increasing a little bit (I forget the exact number -- somewhere around $5k to $10k lost). I've only recently reached the break-even point, where if I sell now I'll have made money overall, and that's primarily because I found a tenant and have been making a profit on it.

The problems are:

1) The mistake most people make is that they look only at initial valuation and the final value of the sale. They forget to include the interest paid over the life of the loan, as well as any home maintenance costs. These add up!

2) Home values are not likely to increase 100% in the short term. If you plan on living in that exact spot for 10+ years, then yes, owning your home is obviously the correct choice. If there's a chance you might move in 5 years or less (even within the same city, to a better place or whatever) then you're probably at least as well-off renting, if not better because you don't have to worry about paying two mortgages during the move and so on. Obviously there're other variables involved, though.

[BrainInAJar]

But that's the myth. The delta between the total costs of renting and the total cost of ownership is wide enough that you can invest it in something that has much better returns than a condo. Even owning 50% of your mortgage payment gets thrown away at interest, plus your maintenance fees, taxes and the whole bit are also lost to the sands of time.

[kazinator]

Rental buildings also pay taxes and maintenance, and have mortgages with interest. These costs are passed down to the renters. All the blood-sucking leeches are there (the government, banks, and the building itself) plus one more blood-sucking leech: the landlord.

[BrainInAJar]

That's fine, someone's getting the money, but the total cost of living there still ends up much lower than the total cost of living in an owned condo.

[kazinator]

If that is so, it means that whoever owns it is subsidizing you to live there. That owner lives somewhere else (paying a cost of living there), and also pays to make up the difference between your cost of living in the rental unit and the true cost. If so, that's a temporary situation. The rent will creep up to eventually close the gap.

[jsuar]

Wouldn't the counter argument be that what the renter doesn't make in equity they would make in returns via stocks?

[toomuchtodo]

As long as the renter is investing the money that would've been property equity in the stock market.

[branchless]

Think in terms of leverage. Next up: should I buy in Detroit - 2005 edition.