Landlords' new weapon: financial education

In many depressed real estate markets, monthly mortgage payments have fallen below average area rents. Rents are falling to narrow the gap, but the National Apartment Assn.has begun a campaign to make consumers aware of the true costs of home ownership.

The group has put together an "are you ready for home ownership" quiz,filled with the kinds of basic questions seemingly ignored during the housing bubble. Examples: "Do you know how to calculate your debt-to-income ratio?" and  "Have you factored in the total costs of owning a home beyond the mortgage payment?"

Perhaps even more useful than the quiz, which in the above link appears on the Indiana Apartment Assn's website, are articles on the site that advise potential buyers on the impact of maintenance costs, taxes and 100% financing on long-term home ownership. 

Yes, promoting renting is obviously in the interest of landlords, but putting out more information to prevent uninformed home purchases is surely helpful, isn't it ?   

--Peter Y. Hong  

   

Comments

[Steve]

What a crock, renting is never better then owning. Even if you buy house with 0 appreiation over 20 years you come out ahead owning. You rent for 20 years you have nothing but a couple of 100 grand in rent reciepts, you buy after 20 years you have have a house paid for, it is cost avoidence. Renting is never better and I am landlord. What hype that you will make it up investing the difference in the stock market, what a joke.

[syscom3]

I see nothing wrong with it.

If it keeps some people from buying then losing their homes, then its worth it.

[Cal]

Steve:"What a crock, renting is never better then owning"

Ok, So I held off buying during the boom and the one "cheap" house we considered in early 2006 at 550k just came back on the market for 350k.

Just on capital appreciation alone I came out ahead renting. Factoring in interest costs, property, maintenance and insurance I am probably 250k-275k ahead of during the boom. l rent in the exact same tract as the above mentioned house as well so rent is equivalent (and going down...).

The real answer is that renting is ahead of buying in many situations.. you just have to learn to do that math for yourself and figure out reasonable rates of inflation and appreciation as they have a wide affect on the rent vs buy calculation. If you are saving significant expense over buying every month and are saving that money (so you get a ROI) then its usually a sure bet that renting is better than buying.

[DF]

Steve:"What a crock, renting is never better then owning"

At the risk of piling on, this is a dangerous and very misguided platitude that I've heard a lot. Three reasons that any thinking person should be able to easily understand why it's wrong.

First, any absolute statement deserves major suspicion. They tell 14-year-olds this when they prep for the SATs; assertions with "always" in them are likely overstated and inaccurate because almost nothing is "always" true.

Second, casual empiricism shows that this assertion is a lie. Owning is always better than renting? Really? Tell that to the countless people who have lost their homes (and, in turn, had their lives shattered) in the housing crash of the past couple years. Does anyone in their right mind think that those people would not have been better off renting and living within their means?

Third, Robert Schiller, the Yale economist whose name is familiar from the Case-Schiller curve (and who predicted the housing market's crash with a high degree of accuracy) has done empirical work showing that when you account for inflation, price fluctuations, cost of improvements, and all the other costs of home ownership, the ROI for the average primary residence is about zero.

Americans have an ongoing romance with the ideal of home ownership (and I feel it too), but a hard look at the data shows that renting is often a smarter financial move.

[Laker]

Cal and Steve,
You can't find the exact answer but you can get a ball park figure by checking the Rent vs Mortgage payment
in 2005, the rent was probably 1/2 of mortgage payment and sometimes 3 times. Only a crazy would buy, and sure during that time rent was 100% the way to go.
If you buy when rent and mortgage are about the same, buy will be the winner (after 5-10 years for sure)
You can look at that also as a stock day trader vs. long term investment.
If you are day trading houses, (buy /sell every two years) then rent might be smart. If you look long term, you will be fine buying at rent=mortgage times....

[schroeder]

No, the system is fundamentally flawed. If there weren't so many landlords (greedy wealthy people who buy multiple properties), more people could afford housing.

[Danny]

Steve, don't forget the hundreds and hundreds of thousands of dollars of interest you are paying over the course of that loan. That's money down the drain. On a 30 yr loan the interest paid is usually about equal to the purchase price, essentially doubling the price of any house.

[Jorge]

DF, while ROI on a home may very well amount to zero, it means over the long haul you didn't lose any money. Compare that to years (or a lifetime) of renting. You cannot recover that money. BTW I'm a renter.

[Laker]

DF,
Those that bought in 2005-2007 with 100% financing and sometimes 115% financing, and the lucky that did that in 2003-4, and pulled tons of equity from "their" houses and got foreclosed, still KEPT all the toys. They are now renting. So compare them with poor Joe renter that is still renting and have nothing in his garage, while these deadbeats have Jetsky, RVs Plasma and many memories on Hawaii trips done with HELOC money for the last couple of years.
I think these people that bought are much better of today than the renters.
The only few that really got screwed are the ones that put a lot of down payment and lost it....there are very few of those.

[JayC]

Buyers and renters both rent. Renters rent homes; buyers rent money. Don't believe that buyers rent money? Look at a mortgage amortization schedule on a standard 30-yr mortgage. Over 90 cents of every dollar you send to the bank is interest...that's not building wealth; that's just renting money.

Whether buying makes more sense than renting depends on whether you can rent the property you want to live in for less than you can spend buying it, and whether you're disciplined enough to save or invest the difference in other wealth-building alternatives to real estate. Once the gap between renting and buying becomes large enough, as it has recently, it's a no-brainer. People who could afford both but rented ended wealthier. I'm proof.

[Steve]

I appreciate all the responses, yet it is this simple, if you are conservative and buy and hold RE over the longterm you will come out ahead. These programs where you rent and invest the difference in stocks is a joke. i.e., I left the hell hole of SoCal 15 years ago for CO. with my equity from one house in Dana Point I bought 10 houses in CO, I put 20% down on each one and was selective on location, price I payed. I am a greeedy landlord and now have a net worth of $3M. Where most of my friends lost 30% of there net worth invested in stocks, I did not loose a dime. If I would of rented my entire life I would be broke.

[Nelcisco]

The home I'm renting currently would be $400 a month less today if I were to pay a mortgage on it, I talking about 20% down at 5.75% interest not including impounds. The only thing I would see different is that I would incure maintainence cost which was less than $1000 last year, because the value took such a dive since the bubble the taxes are less than 3K a year and yet I'd saving $4800 a year between renting and owning, I pay all the utility bills right now as if I were owning it, so as of today it would probably make more sense to own my home than to rent it, the catch is putting 20% down which as a mortgage pro my income has been completely up and down and lots of people are being faced with that dilema from all types of private sector professions.

[Loan Modification]

Very interesting post. Thank you

[Laker]

Jayc wrote: "...Over 90 cents of every dollar you send to the bank is interest...that's not building wealth; that's just renting money...."

Jayc, that might have been correct back in the Carter's and Volker days when interest was 18%.
Today with 4.5% 30 year fixed amortization, you start by paying 74% interest and 26% principle and it only get's "better" as you go. Way better than your 90 cents on a dollar statement....
While i do agree that mortgage is renting money, when you look at the interest portion and compare that alone to rent on comparable place and they are same or better. you can make a decision. Keep in mind that the interest portion is decreasing with time - almost as your landlord (bank) is reducing your rent every month by couple of dollars...

[JayC]

Laker - you are correct. I overstated.

The point, I believe, still stands. People take out mortgages thinking they'll dutifully send in a check each month paying down the balance, plus a little interest to compensate the bank. In reality, the overwhelming majority of each payment in interest, which serves no wealth-building purpose other than a tax deduction, which itself is often believed to be more valuable than it is.

[Laker]

JayC, I agree on that note too.
Those (many people) that don't understand the difference between interest on a CD account, credit card, car loan and mortgage would think that if interest rate is 5% and they buy a house, with a payment of $2000 a month, then $1900 is the principle and $100 is interest (like a car loan - simple int)
That is the reason the bank turn so much profit with mortgages using the fact that avg home owner sells after 7 years..

[Enlightenment]

>>What a crock, renting is never better then owning

Don't use the word never, because it proves you are an IDIOT!

If house prices are going up, then it is a good idea to buy a house.

If house prices are going down, then it is a bad idea.

If you don't live in house for more than 3 to 5 years, then it is a bad idea if housing inflation prices don't cover your bank / realtor costs.

[James]

I know of at least one city where renting is not better than owning: Santa Fe, NM. We have more crooked transplants than I dare say exist anywhere else in the country. For the second time in as many years, I am being cheated out of my security deposit. The first place was a townhouse owned by a jerk who lived in California. He was supposed to cover water/sewer/trash costs, as is common in Santa Fe, and is what his ad on craigslist said. He never did. The water was cut off 5 weeks before my lease ended. In most first world countries, that would render the home unlivable. But not to this bozo. I withheld rent and asked him to turn the water back on. He wouldn't and he kept my security deposit. I brought in jugs of water to clean the place at the end of my lease. He complained because I left some boxes in the garage. There was no trash pickup! He made off like a bandit and I had to find a new place to live AND come up with a security deposit again.

The next place developed severe electricaly problems a few months after I moved in. I toughed it out because the landlord was willing to cover ALL utilities in exchange for higher rent, which was extremely convenient and worth a lot to me. She did this in part because the laundry was in my house and was shared by two other houses. I moved out at the end of June, after 13 months (on a month to month lease), because she kept bringing in unqualified non-electricians to fix the problem, and of course they couldn't. This piece of work that is my landlord has the unmitigated gall to send me an email with the last twelve months electrical bills and offers me a check for $144 for my deposit, which is all she claims that is left of my deposit after the electricity is subtracted. This is illegal under New Mexico state law, and I hope to resolve the situation, but after these two experiences I'd prefer to live in a cardboard box if I owned it, than rent in Santa Fe. So don't feed me a line about how it is better to rent than to own! I ain't buying that crap.

[momwith2]

Rents in our market (East Bay of SF) are much cheaper than mortgage payments.

We bought a "starter" home in 1993 and paid under $200K. We sold in summer of 2008 for $550K. The proceeds (because we had tapped equity to improve the property) were around $160K. That's now invested in FDIC-insured banks and we are getting a modest 2-3% return which is better than property appreciation because houses are still going down in our area.

Could we have saved $160K during the 15 year period that we owned our house? Maybe but unlikely because we took advantage of appreciating prices. Also, if we had been renting, we would have blown the money we saved each month on vacations or other goodies so owning was a form of forced savings.

However, we are renting now and paying less than a mortgage would cost (with property taxes and upkeep factored in).

We will buy again in 3-4 years and hold for 15-20 years.

Whether you rent or own really depends on your situation and what area you live in.

[Different Steve]

Renting a property currently valued at 1.2 million in a desirable area for $2200 per month. 2000sqft 2/3 home on a double lot. Utilities are minimal. Ammoratize that loan amount for the payment and tell me that buying it would make more sense.

Sorry, the oft repeated mantra of RE industry wags is being shown for the nonsense it is.
"Housing ALWAYS goes up!" ...until is doesn't.
"You're NOBODY until you own a house." Really? To who exactly?

Success is not defined by a mailbox stuffed full of credit card and equity loan offers. And holding fast to a disingenuous notion like "Buying is always better than renting" does not excuse the personal responsibility of doing the math.

P.T. Barnum was so right. ...and they truly walk among us.

[Laker]

Different Steve, "....a property currently valued at 1.2 million in a desirable area for $2200 per month..."
Which zip code? Where?
Either:
1) The place is trashed and the $1.2M is from Zillow dreams
2) Very dumb landlord
3) insane rent control rules
4) renting that place for the last 20 years with rent control.
5) lying about your rent.
6) place is actually worth $400,000

Which one is it?

[Nelcisco]

Reading others' comments just concludes that it all boils down to the individual's personal experience, renting would make sense to someone like Different Steve because of what he pointed out, but for someone like me it would make sense to own at this point because of what I pointed out earlier just as long as there's a down payment,but I think we can all come to some agreement that owning i'snt "ALWAYS" better than renting.

[anyone]

Renting or "owning" it's all the same. All our mortgages are based on fraud created out of thin air. You all need to do some serious research on our monetary system, if you did you would be very pissed off! So in the end no matter if your renting or "owning" (let's see how long you homeowners would be aloud to stay in your houses if you decided not to pay your property taxes NOT LONG so to me that is also called RENTING ... you rent your place from the "bank" which is your "lanlord"! So in conclusion we are all renters whether it's from a bank or a landlord, the joke is on all of us!

[Richard Wicks]

In Silicon Valley, it definitely makes more sense to rent than own.

Property taxes here are insane. Basically, to buy a place, yearly property taxes is 1/2 year's worth of rent. Owning a condo, you have to deal with HOA fees on top of that.

It's not made any financial sense to purchase here since 1997. Sure you could make a profit but only because there are far more fools here than I could possibly have imagined. Now, all these fools are broke. Prices are coming back to earth, and jobs are leaving the area because it's just too damned expensive to live here.