I just read a post by Chris Welch titled Misconception: Renting is for Suckers. My take on it is that when buying a house you are not making an investment as much as you are committing to a liability. They talk about PITI costs (Principle, Interest, Taxes and Insurance). This of course reminds me of my current situation which I wrote about in Why I Chose an ARM Mortgage. Here is some of what I said then:
Essentially we are only paying rent on this house. However, our gamble (business plan) is that the value of the property will continue to grow at a somewhat similar rate for another year or two. This house will be a liability for a few years, but it does have the opportunity to yield a pretty great return. As long as the house appreciates at a rate that is higher than our interest rate (which is below 6%), than when we sell the house in a few years we will have lived there for free and will still make money. To me this means I can count this purchase as an investment instead of as a liability. We will have some equity thanks to our down payment and the growth rate.
So the money I put down is the money I am investing. Sure, I could lose money on the investment, but that is true for any investment that could have returns higher than the rate of inflation. My “rent” is tax deductible in this case too. The question then becomes whether or not I am getting a good deal on my rent. Here is what Chris is saying:
For example, I live in Northern New Jersey, and currently pay $1,000/mn for my 1 bedroom apartment. I would be better of financially if I were to buy a condo that cost up to $125,000. The only problem is that where I live, there’s nothing habitable that I can buy for under $125,000, and if I spend much more than that, it’ll actually cost me more money to buy than rent!!! Unfortunately this is a problem shared by my friends in major cities around the country.
I am living in East Nashville which is a hot area but the rents are probably still lower than elsewhere in the city. I am living in a 2 story brick house with over 2000 square feet of living space that also has a full basement. The house was fully remodeled just before we moved in. It is a single family home with a good sized yard for the kids and good neighbors. To rent a similar home in Nashville would cost me considerably more than $1000, possibly over $2000 a month. It would also be much harder for me to find. My house payment is much less than what I would expect to pay in rent for the same space.
I agree that renting is not just for suckers. I like the 1:12.5 rule of thumb that Chris posted (I think we followed it by coincidence). It needs to be adjusted for increases in rent that tend to happen from year to year since when you buy a house you are locking in at a certain rate.
For every $100 you spend in rent a month, you’d be better off buying up to $12,500 in property instead.
Maybe it works in reverse too. For every $12,500 spent buying property you would be better off paying $99 in rent.
