Paying Off a Mortgage Takes Longer Than Saving Up While Renting

[Serpent]

If home prices are too high renting will win. If the rental market is too tight then owning will win.

It's not as clear cut as "where did the money you paid for rent go" because if you pay LESS for rent than you would have paid for a mortage you are saving the difference. If the savings add up to more than the home appreciation then it's a big win.

Bingo!

Plus, don't forget the added overhead of home owners insurance, HOA fees, property taxes and other misc. taxes.

To me, it is a simple thing - if the mortgage is significantly higher than current rent, save the difference and invest.

We call these folks "Fucked Borrowers" in the US because they follow the herd, buy homes hoping for appreciation and take on mortgages that put a stress on their personal finances (and lives!) .... all because they've bought into the myth that renting is more expensive. That is not the case all the time as you pointed out.

This blog is one of my favorites and here is an older post:

http://anotherfuckedborrower.blogspot.com/2005/12/lets-play-should-i-buyor-wait.html

 

[21pro]

for all ya non-believers... i've sourced an investment pro's ideas:

I could have bought a house long ago," said Kanitz, director of Wood Gundy private client investments, who writes a regular column in the Canadian MoneySaver.

"The truth is, by the time I finished university I had lost so much in the stock market I was broke and wanted to get revenge.

"This meant buying a house was out of the question and that every dollar I could save had to go into the stock market. That's the origin of my 'rent and grow rich' mantra which I have followed for nearly two decades and I still believe it is good reasoning."

Kanitz admits, "I'm not like most people."

He works in the stock market and can comfortably afford his $3,500 monthly rent. He owns 70 stocks and said his investments have averaged an annual return of 20% since 1982 -- quite a feat for even a skilled investor.

He accepts the benefits, both personal (security, independence, pride, stability) and financial (potential to invest sweat equity to earn a tax-free capital gain) of owning a home. But he also points out the costs: mortgage interest, maintenance and repairs, insurance, taxes and what you could have made by renting and investing. By comparison, renting is relatively cheap.

You don't have to earn big money or spend thousands on rent. But if you hope to rent and grow rich, you must:

* Have the discipline to invest what you save by renting instead of buying.

* Have or develop investment skills. You might not work full-time at it the way Kanitz does but probably should spend 15 to 20 hours a week managing your money whether it's in the stock market, revenue property or a business.

* Place more value on making money than on the personal benefits of owning a home.

Should you redirect some of the money you have or plan to have tied up in your home into more active investing? If not, at least use part of the home to earn income from a tenant or a sideline business -- or, if you feel comfortable with the risks, borrow against the equity to invest.

A final comment from Kanitz: "I rent to get very rich. Eventually, I will probably buy a house -- a million-dollar house -- for cash."

I can't find the original article that explains exactly how it works out but I believe there is a simple formula to decide when to buy and when to rent.

generally speaking, if the rent price is greater than .7% of the sale price than buying is more affordable.

on a $400,000 house you'd be saving money if you can rent the whole house for any amount under $2800/mth.

i go better then that, though... to try and get the greatest savings out of renting...

i pay $1800/mth and rent the whole 2.9 acres of a $700,000 house in Caledon.
it works out to be about .255%

 

[mmouse]

21Pro, it appears that:

1. You've made poor decisions and/or been unlucky when buying property both as a homeowner and a landlord;

2. You've been lucky with your other investments which have given you above average returns;

3. You've been lucky in finding a rental property at well below the fair market rental value.

So your experience is kind of meaningless for most of us.

 

[fuji]

Stocks vs home ownership.


I've made gains of 120% and 150% (more than doubled my initial investment) respectively on my real estate in a matter of 3 and 4 years respectively. This is tax free cash in my pocket. No other investments can bank that kind of tax free cash legally.

I'm assuming that to get that gain you had invested heavily on margin, meaning, you didn't buy the home outright, you bought it with only a % down and took a mortgage.

When you buy on margin/mortgage the risks are much higher, as are the returns. With 10% down a 10% rise in property value doubles your money. Similarly, a 10% decline busts you out.

I just want to check that you are comparing apples to apples here: You are comparing unleveraged real estate purchases (no mortgage) to unleveraged stocks. To compare a mortgaged real estate purpose to stocks properly, you ought to be comparing to a brokerage account with an equivalent amount of margin.

 

[Meister]

I've made gains of 120% and 150% (more than doubled my initial investment) respectively on my real estate in a matter of 3 and 4 years respectively. This is tax free cash in my pocket. No other investments can bank that kind of tax free cash legally.

That assumes that you are going to sell and take the profits to relax in Hawaii. But, in most cases people sell to buy an even bigger house with a bigger mortgage. It all works out fine unless you are caught in a cycle downturn. My former neighbour had to sell his house he bought for 600k at a substantial loss in the early 90s and move into a 230k house because he bought the expensive house before selling his previous house and got caught in a spiral.

 

[Von Wigglestaff]

agbu

I've got news for you; I put down a 35% down payment and I'm still paying a goofy property insurance rate. Of all the mortgages I looked at the ING Unmortgage was the only one that was true to it's name - unfortunately it also caries the highest insurance premium.

The lump sum payment is a very effective way to cut down on your interest payments. I've been doing it for the past year and the principal on my mortgage has increased by 15%.

Tiberius you are so right about the social life. I've had to come up with money for therapy since I can no longer afford the new car, the excessive hobbying and the trips abroad. The Monty Python's Holy Grail Tour of Scotland has been shelved for another year. Probably just as well; Airport security would have confiscated my coconuts.

Tiberius, get rid of your Zardoz avatar, I'm beginning to shave compulsevly.

 

[mmouse]

Von Wigglestaff, who is agbu? Why does having an ING mortgage make any difference to the cost of your insurance? Who is Tiberius? Who is Zardoz? What planet do you come from? Where do you buy your drugs from?

 

[ontario]

This is quite simple. Given the high home prices today and the weak rental market it is definitely cheaper to rent comparable accomodations in 416/Toronto in 2006. There's no question. $500,000 condo rents for $2000 per month yet carries $2000 per month in interest alone- BEFORE taxes, maintenance, and insurance. There is no comparison whatsoever in today's market.

However

If you are shopping for a home that you plan on making your permanent residence and further that you plan on raising a family in at some point in the future you should consider the advantages of owning a single family home. I agree with the poster that without question a long term renter who invests the net savings over home ownership comes out way ahead but it does take enormous discipline to do so.

To the posters who argue that they've done well owning property up to this point all I can suggest is that you all owe a major DEBT of gratitude to bank of canada (and indirectly the american federal reserve) for the gift of asset inflation. Going forward you can be assured that the gift giving season is over.

 

[Viewer]

Von Wigglestaff, who is agbu? Why does having an ING mortgage make any difference to the cost of your insurance? Who is Tiberius? Who is Zardoz? What planet do you come from? Where do you buy your drugs from?

Oh goodie! A quizz! Ok, I`ll take a crack at some of these:

agbu is a terbite who posted in this thread:
>https://terb.cc/vbulletin/showthread.php?t=134184&post=#15

ING, like most lenders, offers mortgage insurance (not home insurance).

Tiberius is James T. Kirk`s middle name.

Zardoz is the name of the freaky, strange and offputting movie from which *our* JTK took his freaky, strange and offputting sig pic - the one Sean "Bond, James Bond" Connery wishes he could delete from existance.

Planet - Damn, got me there.

drugs - I know, but I promised not to tell.

Do I win anything?

 

[21pro]

fuji, a $200,000 house I bought with 25% down ($50,000) was sold three years later for $440,000. I used that cash profit to put a $250,000 downpayment on another house worth about $350,000 that I sold 4 years later at $875,000.

So I turned an initial $50,000 into a cool half million in 7 years using simple math.

good for you sheik. it seems that we are both on the same track. do what you know best.

i can say i've owned houses in the fastest appreciating markets of Canada over the last 6 years. (2001 is when i bought my first house)- i'm still pretty young. I made nowhere near the amount you did from them appreciating- but, again, the money is made when you bought the house, right? 6 years ago i was completely new to RE investing. I've made good money in it, but my time is worth more than what it takes to invest in RE...

remember, all aspects of expenses dealing with RE are rising. - meaning, mortgage rates, utilities, property taxes, construction costs, labour, building materials... even fuckin building permits are becoming more expensive.

in the stock market on the other hand, only some really know that expenses are decreasing. dramatically. consider discount broker fees. TD Waterhouse charges $29/trade (industry average), Qtrade charges only $9.95/for that same trade.

For 80 some years, investment successors were saying what all is true. That the highest returns represent the highest risk. and are in this order.
1. your own business
2. private business investments
3. equities- including commodities, public co's, etc...
4. index funds
5. assorted bonds
6. real estate ownership*
7. cash, cd's t-bills, etc..

*if RE is treated like a business, the rate of return is possibly far better as is the risk is greater. however, this is business, not just real estate ownership.
simple real estate ownership only appreciates in the long term in exact accordance to inflation. in a way, it's meaningless appreciation.

 

[21pro]

1. You've made poor decisions and/or been unlucky when buying property both as a homeowner and a landlord;

poor decisions, maybe- as i climbed a quick learning curve. However, I outperformed the market during that time. Hence, I did better than what was expected of someone during that period.

2. You've been lucky with your other investments which have given you above average returns;

No luck involved at all. Luck doesn't last over 10 years in the stock market. I have a simple methodology that works. It involves 3hours of maintenance every 4 months or every quarter.

3. You've been lucky in finding a rental property at well below the fair market rental value.

No. No luck. If you look today, you will find these deals everywhere. But, people are blinded by all of the prestige and advertising promoting home ownership. The truth is, today in the GTA, it is waaay better to rent and invest your savings. even if you're investing is in real estate.

I rent, because I have the house I want, in the location I want.

My landlord absorbs all maintenaince repairs and property tax increases

Interest rates alone on mortgages have increased faster than the 2.6% per year a landlord is allowed to increase my rent. that's if a landlord remembers to increase his rent each year.

I am getting rich doing this. And it's fine that no one believes me.

Keep in mind that I've stayed 100% on topic with the thread starter. Not like others. I am in 100% agreement with his postulation that :

Paying Off a Mortgage Takes Longer Than Saving Up While Renting
-some argued to make yearly 13th month extra payments or up the amount you pay. sure it shortens the length of a mortgage, but it also costs more then the monthly commitment of renting and saving. If you chose to change the rules in that regard, then I'd suggest you could effectively, then save that much more in investments and then again, beating the time it takes to pay off a mortgage all over.

 

[Consilio]

I haven't bothered to look at the spreadsheet but..

There's no way. Have you considered the following?
1) Your rent will go up every year.
2) Your mortgage payments will not.
3) Your house value will go up.
4) There's just no way.

 

[21pro]

I haven't bothered to look at the spreadsheet but..

this is truly evident.

 

[mmouse]

I just want to check that you are comparing apples to apples here: You are comparing unleveraged real estate purchases (no mortgage) to unleveraged stocks. To compare a mortgaged real estate purpose to stocks properly, you ought to be comparing to a brokerage account with an equivalent amount of margin.

Very good point, although comparing a leveraged investment in real estate VS a leveraged investment in stocks is not a level playing field.

Say I have $100k cash and no other assets and walk into a bank. They will happily lend me $300k at an excellent interest rate to buy a property. However if I want to borrow money to buy stocks, I'll be lucky to get 50k at a much higher interest rate (depends on my income).

At the end of the day, very few people borrow money to invest in stocks, lots of people borrow money to invest in real estate. There are many good reasons for this: cost of borrowing, ease of borrowing and real/perceived risk.

Another nice thing about leveraging your principal residence is no capital gains tax of course.

From rough calculations, I'd have needed to make about 80% on unleveraged stock market investments to equal what I've made from leveraged real estate investments in the past few years.

 

[ontario]

No. No luck. If you look today, you will find these deals everywhere. But, people are blinded by all of the prestige and advertising promoting home ownership. The truth is, today in the GTA, it is waaay better to rent and invest your savings. even if you're investing is in real estate.

So true. The herd mentality has lured unsuspecting buyers into the market but the reality is that you are way better off renting. It's ironic that you need to be convinced of this common sense fact but the public typically follows a trend until it reverses.

Good on you for going against the grain and profitting from it!