COMMENT OF THE DAY: THE RENT RUSH 
“One of the reasons rents have gotten pretty high in the last decade is people finally realized that owning a house is not what it’s cracked up to be. You can have a pretty decent apartment inside the loop for $2k a month which will only buy you about a $200k house which means you get an old small house between the loop and beltway, or a decent new house outside of the beltway. Also, you don’t start building real world equity in the house until after year 7 and coincidentally average time people live in a house is 5-7 years. Renting also allows for extreme flexibility in case your job changes, you create little clumsy clones of yourself, or simply don’t like changes in your neighborhood.
There was a study that showed that during the great recession there was a much higher rate of unemployment in Home Owner vs. Renters because after losing their job, Home Owners either were unable to sell or refused to sell their homes and simply move to an area with better job prospects.” [commonsense, commenting on Houston’s Most Expensive, Deadest Neighborhoods; The $10 I-10 Toll; Drinking from Lake Conroe] Illustration: Lulu
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Math’s a bit off. You can get a $300,000 home for comfortably under $2000 a month, comfortably enough that you can add property tax and insurance and still probably be under the $2000 a month limit.
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Low interest rates are a hell of a drug.
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Toss in a decent downpayment around 10% and you’re able to get into a small house in the fashionable areas.
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Imagine though if you buy a cheap house over in the east end, your payments will be closer to $800 a month, maybe $1000 with taxes and insurance.
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Forget all that though. You buy a house, you pay the mortgage, that is the mortgage payment for the next 30 years. it doesn’t change. That renter? You both were paying $2000 at the beginning of your mortgage, your mortgage which has been $2000 for 30 years goes away. After 30 years there’s no telling, his rent may be as high as $4000 a month, and he has to keep paying.
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Think about someone who picked up a mortgage in 1985 for $400 a month (about the price of an apartment rent back then). Today they’d be making their last payment of $400. The guy who’s been renting for 30 years would now be paying $2000 a month.
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Yeah, rent is grand. rent is great! You must be a landlord.
Strange, since my $2k/month (inc tax and ins) mortgage got me a 4/2 house zoned to Pershing and Bellaire that has increased $150k in value over two years. I’m also in the loop so getting to any employment center is a breeze. I also have “little clones”, and the changes in the neighborhood are that they keep building mansions around me… I guess renting would have been the better call?
Your math is way off.
For young single people, it is a no brainer between renting inside the loop and owning a house way out in the burbs. But this is nothing new. I did this when I first came to Houston and lived in apartment complexes filled with young people just like me doing the same thing. Rents have spiked because demand for multifamily surged at a time when there was very little new multifamily under construction. And if everyone was giving up on home ownership, you would not be seeing a very strong and resilient single family housing market.
Exactly, the math is way off. I have 2,900 sq’ high end townhome inside the loop, mortgage is fixed at just under 3% and P+I is a bit over $1,600. Key is a decent down payment and low interest rates. But even in less luxurious digs, the math still works. I started out in another state with a much more modest place and higher rates… With the appreciation there, and with another place in between, put me in a position to own what I have today. Landlords put out great PR on the virtues of renting — I know, I rented one of my places out when market was too low/soft to sell. Double bonus, owned the place I lived in, rented out the other, which more than paid for that mortgage, taxes and insurance, and rode out the recession for some healthy appreciation when I did sell! The wealthy, the 1% (which I am not quite a member of) are not renters, lol, they own. They must know something!
Yeah, and eventually people will realize that renting isn’t all it’s cracked up to be either. You’re not allowed to make alterations to your unit. You’re beholden to someone else for repairs (great if they’re with it. Your rent can (and will) increase year over year. You don’t have nearly as many rights when it comes to being evicted. You’re not building ANY equity at all.
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Worst of all, houses have traditionally been our largest assets. It’s nice to think that people who don’t buy houses will buy stocks and bonds instead, but do they really do that? I didn’t when I was a renter, and I doubt many renters do. We risk creating a permanent, asset-less underclass of renters. That should scare us all.
Although I generally agree witht the comments above, they are all assuming no downside risk (I.e., housing will appreciate forever). Houston was fairly lucky this last cycle, but talk to people in Atalanta or the valley in CA that are still underwater whether their house was such a good investment. I’m still a fan of owning, but I think some people are dangerously assuming it is a no risk proposition.
Are there no Editors or factcheckers anymore? This was a horribly researched voodoo math version of a glorified Facebook status update.
Property taxes and mortgage interest are tax deductible, and having just completed my return 6 weeks ago, I can attest that this is a huge boon. (The US government subsidizes home ownership in a big way, costing the treasury about $140 billion this year.). Is rent tax deductible?
I have bought and sold a dozen homes over the years personally (and rented) and have dissected at least 50 HUD1 statements for the company and clients. You guys are forgetting some real world factors like most people do not qualify for 3% mortgage, it’s usually close to 5%, most people put next o nothing down and that gets eaten up by closing costs. Then there’s PMI, Home Owner’s Insurance, HOA fees etc. Then you’re forgetting that average appreciation in real estate values is in low single digits and cannot be compared to handful examples in popular neighborhoods. Then when you sell you lose about 10% of value to realtor fees and closing costs. Then all the money down the drain for maintenance and inevitable remodeling projects.
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Having said that the key is how long you’re planning to live in the house, 7 years has been the historical break even point, not just according to me but any number of financial publications.
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The 1% generally buy homes cash, not with a mortgage, which makes all the numbers irrelevant. Plus if you have a very expensive homestead paid for in cash, it’s a sort of an insurance, in case your business fails or some other catastrofic financial situation, the homestead is immune from bankruptcy and creditors, which puts your back on top immediately.
…and there are the transaction costs of buying/selling.
@Mickey I love how try and convince us that your numbers do work, but then finish with “Key is a decent down payment…”. Easier said than done. BTW all you folks saying you have these 4 bedroom 2500sqft places with newer mortgages less than rent may live inside the loop, but not in midtown or Montrose, which is where 1/3 of all the apartments in Harris county are being built.
remember when the stock market peaked in 2007 and then 6yrs later finally inched above that point again. yeah, expect the same for your home values in Houston at this rate. maybe not 6yrs, but certainly a good number of them.
also, if you’re willing to make some lifestyle sacrifices you can still rent in the inner loop for less than what your neighbors pay in property taxes alone.
Some of that math is off by quite a bit, but he is right that you shouldn’t be counting on appreciation when calculating this. That’s some serious vodoo math to act like what happened in the Heights is indicative of a trend that will keep going. Some appreciation IS likely. But on the other hand it’s also likely that interest rates are going to go up, which is going to drive DOWN prices. It’s also likely that inflation is going to eat away at that as well. In fact some of the numbers I’ve seen show that home appreciation rates account for almost all of the aggregate home appreciation over the last 40 years. There are a LOT of competing factors affecting home appreciation, and it’s sort of nutty to pick a positive outlier like the Heights and say that’s the expectation.
For the sake of financial planning I wouldn’t go much further than saying that the house will hold it’s inflation adjusted value over time, which is still a decent investment.
The biggest issue is that all of the new rental stock (the Texas donuts) are owned by large corporations whose strategy is to keep upping the rent substantially every year until its at the breaking point of what people will pay, forcing them to move and seek out a new complex offering good first year specials. At the new place, the process will begin anew. When younger renters tire of playing musical apartments, and they can do so in an area they like that meets their needs / wants, then they will buy.
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Being a renter of in-town space in Houston means picking up and moving every few years unless you have found an older place that you like where the owner has picked a set rate and doesn’t want the hassle of new tenants every few years and values existing tenants who pay bills.
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Renting houses for a family just doesn’t make financial sense unless you can’t afford to buy or you aren’t committed to Houston. For a house as opposed to an apartment, it makes sense to buy if your job is stable.
Ok, I went and tested the numbers on an ACTUAL EXCEL SPREADSHEET (*gasp*). I used the following assumptions. 2% appreciation rate (matches inflation more or less, pretty conservative). 200k purchase price. 5% down. 3.65% interest. 6k closing costs when bought. 10% closing costs when sold. Right off the bat you are 16k in the hole (10k down – 10% sell +6k closing costs). Your break even (counting the cost to sell) is between the second and third year (counting from year 0). By the 7th year you are looking at 38.9k in equity that you would be able to roll into a future house. This math changes a bit depending on how you account for your old down payment. If you handle the down payment slightly differently you end up with your break even on third and fourth year, with the final equity at 7 years = 28k or so.
Anyways. You break even well before 7 years, but you haven’t built a ton of equity before then.
@Rex,
I used to own a 2/2 townhome in Midtown that cost me $1695/month. Comp rent in the neighborhood would have cost me $2100/month. After I sold (living there five years), minus the commissions, fees, maintenance, etc. my five years in Midtown cost me $324/month for a 2/2 nice townhome w/ a 2 car garage and side yard.
WORST. COMMENT. OF. THE. DAY. EVER.
The math seems simple to me, so maybe I’m missing something. Every cost incurred by a landlord has to be passed on to a renter, plus profit for the landlord. Doesn’t that mean owning will always be cheaper than renting, even without the tax breaks and appreciation?
> Is rent tax deductible?
No, but renters absolutely benefit indirectly from their landlord’s ability to deduct interest and property taxes. They also benefit from the landlord’s ability to deduct insurance, maintenance, and depreciation expenses, which ordinary home owners don’t get to do.
@Rex, define “newer”. We bought in Montrose less than 2 years ago, and our mortgage is almost exactly at the median rent for a 2BR apartment. Our house has 3BR plus another BR in the garage apartment, total sf around 2400. Trick is, we put enough down to avoid the higher interest rates on a jumbo mortgage. Interest rates these days are lower than ours by nearly a point, but dirt values are higher.
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It’s stupid to make these comparisons about what people can pay for rent vs. mortgage without taking into account age or how far along they are in their careers.
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I’ve lived in Montrose since I graduated from college, and I couldn’t afford to buy when I first got out, either. I rented in older 3- and 4-plexes for 7-8 years while saving up a downpayment, and then ended up buying a crappy older remuddled bungalow that had had renters living in it for a decade, i.e. a starter home. And then I lived in the crappy starter home for 20+ years while trying to find the house I really wanted to live in, and incidentally saving up more money for the next downpayment, and building equity in the dirt under the crappy starter teardown.
Also, if you pay extra on your note, you can be on path to pay off the home in around 15 years while still having the security of lower payments on a 30 year note if you need to go back to the payment negotiated on the 30 year note. So, the idea you only have equity in year 7 just does not match the reality if you bought a home for a price below what the financial calculators said you could afford – in my view the financial calculators are crazy and designed to have you buy in to the idea that you will be in debt your whole life.
I will grant you, Rex, that there is usually a delta between rents in a neighborhood, and home prices. You see it in desirable neighborhoods Inside the Loop (Montrose; Midtown) – where houses are almost exclusively for the rich, and normal people rent. You see it in areas like Greenspoint and Gulfton, where houses are affordable for normal people, and apartments are affordable for the poor.
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Also, when it comes to a decent down payment, it’s best to think incrementally. Ideally you get out of college, put $10,000 down on a $50,000 condo with no more than a fifteen year mortgage. By the time you’re in your mid thirties, you’ve got at least $50,000 in equity (more if the condo’s value increased). That’s enough for a 20% down payment on a $250,000 house. There you go.
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(I wish I had done it this way, btw)
Even with all the goalpost-moving, Commonsense’s math is still way off. $2000/month will get you a $300+k house, not $200k. It’s not all that hard to avoid PMI or put down a down payment. If you’re paying 5% interest today, you’re doing it wrong. And HOA fees are just a few hundred bucks a year in a normal neighborhood, not an amount that significantly shifts the calculus between renting and owning.
Also worth noting that the housing market goes up and down, but trends upward over time. If you play it right, there’s no need to sell at a loss, if you want out of the house when the market is down, not to worry: just rent it out while the market bottoms out and comes back; then sell.
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The clincher is: never buy more house than you can afford. In fact, buy much less than you can afford. Always go with a traditional fixed mortgage, and make sure that you can make the payments no matter what.
Over a lifetime, people who own always come out way ahead of people who rent. The bumps in the road in home ownership (transactions costs of moving, unexpected maintenance, market bubbles bursting, being underwater, etc.) are always offset by the lifetime benefit of building equity. In order to mirror the same economic benefits of building equity, renters have to invest more of their money every year than a home owner does for retirement. This rarely happens because people in the U.S. are generally terrible at saving money and renters will see their rent increase over the years much more significantly than a home owner would see taxes rise. Every dollar spent on rent is a dollar that is gone forever. Most every dollar put into principle on a mortgage is a dollar that will at the very least be there as long as the home is owned or could be a dollar that returns a couple of dollars in market appreciation.
I think we would all agree that buying is clearly the best way to go, but it just doesn’t allow the flexibility that a lot of people need or have forced on to them with the current job markets (i.e. millenials). Down payments are a big hindrance as it’s taking new grads many many years to achieve respectable salaries. I certainly don’t know many of us millenials owning in the loop outside of those with 2 x six figure incomes and singles in smaller 1bds.
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I’d still recommend renting below your means (which means avoiding the inner loop altogether unless you can find decent old housing stock) as you wait it out to decide where to set your feet and grow a family.
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I also wouldn’t agree with making additional payments on the house note with a rate below 5%. Yes, it’s nice to have the security knowing the state can’t seize your home, but if you can afford to make that many extra payments you’re not really in the percentile with those kind of worries. That’s cheap money that you can find a lot of other places with much more opportunity with all the tax advantaged accounts at hand today ( so nice to be wealthy these days), and hobbies to turn profitable.
commonsense is wrong, but not for all the reasons you guys are pointing out. It has nothing to do with anyone realizing they had the relative value of renting vs. buying wrong. It has been because…
1) Demand for housing is relatively inelastic in proportion to population
2) Houston has been booming population/employment since 2010-2014
3) Housing unit construction came nowhere near matching population growth during this time period
3a) Single family units have been way undersupplied relative to historic norms (population growth/units permitted)
3b) Multi family units have been a little oversupplied during this time period (population growth/ units permitted)
3c) Leading to a pretty drastic undersupply of new housing (single + multi family) units between 2010-2014
Again, yall continue to have the down-payment caveat to your lower mortgage. OF COURSE YOU CAN HAVE LOW MONTHLY PAYMENTS IF YOU PUT MORE DOWN. Those of you in a townhome had to have snagged them up more than 2 years ago. If you are in a condo you have taxes and HOA which could be the same price as your mortgage. Renting makes a ton of sense to me and is the only option for most in these desirable urban neighborhoods. Get used to it. Of all my friends living in desirable urban neighbors across the America, not one owns, they all rent.
The Houston housing market as it currently stands (and really, since 2012) is inaccessible to those of us in our 20’s who don’t receive outside financial assistance from family or friends. Believe me, I’d like to stop renting and start putting a portion of my housing costs towards building equity. But, go look at $50k condos on HAR (seriously, go look right now!) and tell me if you would like to live in one of the many active listings for sale.
Bingo awp!
Plus it should also be stated that all real estate is local, so while Montrose/Midtown have higher rents, places like Pasadena, Channelview and Alief do not.
Whether $2000/month can buy you a $200k house or a $300k house is largely irrelevant. What makes renting attractive to many people, especially younger people, is the fact that the high transaction costs associated with buying and selling real estate make owning much less flexible than renting.
Let’s start by breaking the realtor cartel that hoovers up 6% of the sale price on every real estate transaction. Taking some pictures for the HAR.com listing and hanging a Supra box on the door knob can be done for a lot less.
Then let’s free the market for title insurance. Currently rates are set by law, so title insurers can’t compete on price.
There’s no reason why moving from one $500k house to another $500k house should cost someone close to $40k in transaction costs. Isn’t lowering transaction costs why Al Gore invented the internet?
I strongly agree with commonsense on this one, but I take it several steps further (and walk it one step back).
Most consumers do not adequately budget for repair and maintenance, do not understand their insurance policies, and often do not maintain adequate liquidity to cover the possibility of paying a deductible. Many homeowners forget to put a value on their time in dealing with these things; other people seem to place such a large value on their time that they defer maintenance for no particularly good reason, leading to additional costs later — although many such people might simply be dysfunctional nitwits, ill-suited to taking any form of responsibility. That brings up another risk: you might end up living next to one or more such people for quite a while.
Most consumers approach their housing needs differently if they are buying rather than renting and they end up buying more house than they would ever feel comfortable renting. To some extent it reflects physical differences in the housing that has been built for rental rather than what has been built for sale. A one- or two-person household often has no practical choice other than to buy too much house. (And condos. Pfft. Condos are terrible investments. That’s just throwing money away, especially if we’re comparing a nice new apartment to a condo of equivalent size and age and location.)
Here’s another short-sighted thing that a lot of consumers do: they use their new-found freedom to personalize their home. We see it all the time on Swamplot photos of the day. There aren’t very many people that can do this, add to resale value, and make it worth their time, money, or effort. Sometimes that’s all fine and well and they don’t care, but often they really shoot themselves in the foot. Home buyers also tend to spend a lot more money on furniture and appliances than if they were to continue to rent. That can likewise be rational but its probably not built into their rent-vs-own financial analysis even if their behavior as consumers is directly tied to the outcome of the decision that they make.
All of these things being said, I’ll walk the argument back one step. Nobody mentioned that an owner-occupied home is subject to bankruptcy and homesteading protection. That can be useful if you have a business that pays you income and that has business debts that are tied to your personal finances. If something goes wrong then you’ll get wiped out financially but you can keep the house and a lot of its contents. That can be useful.
@Andrew: “The Houston housing market as it currently stands (and really, since 2012) is inaccessible to those of us in our 20′s who don’t receive outside financial assistance from family or friends. ”
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It’s been like that for some time. It was just as inaccessible when I was in my 20s in the 1980s and 1990s. My folks were able to buy in their 20s, but I think they got a big loan from their parents or something.
And then there is the whole “skin in the game argument.” I shudder to think of what a rent-only single family home neighborhood would look like after a few years.
@Joel – I bought a home that was about $150K less than what the rent calculators said I could afford. It’s about finding good deals on quality purchases and making compromises on other issues. That’s how I can make a payment that puts me on pace to pay off 15 years after purchase. I’m certainly not wealthy. I do agree that if you are renting to rent below your means. I did that, too, prior to buying.
Why does so many recommend a 30-year mortgage and low down payment? You throw so much money at interested, it’s ridiculous. Paying PMI is money down the drain — don’t do it. I purchased my first home with a 30-year mortgage and paid extra $ each month (which turned it into the equivalent of 22-year note). At the time, I was a DINK, but I knew it’d only last a few years before I’d be on one income with children in tow.
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A few years ago, I refi’d to a 15-year note and have enjoyed it more. Yes, it’s more money and it has made the last few years a bit tight, but I’m happy to know that in 12 years from now, I’ll have paid off the house. Had I done this from the beginning, I’d have $1K/month, though.
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Housing as an investment is still an expensive proposition. I believe you’re more likely to make more money in the market than in a home. The nice thing about owning a home is that you can live in an area that you would otherwise not be able to afford in the future. New builds in Museum Park are $550K to $1M these days. Glad I got in when I did.
People like Rex are really shooting themselves in the foot and they don’t even know it. They say “I wanna live in the coolest neighborhood even though I’m only 26 and make less than $40k a year.” So they spend 50% of their salaries to rent a miniscule apartment (or a room in someone else’s apartment), and then they whine about how expensive Houston’s getting.
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But they’re really throwing money away. There could be something to be said for renting a dirt cheap apartment on the wrong side of the tracks, and plowing a ton of money into investments, but they’re not doing that. They’re going to wake up one day, in their early or mid 40s, and realize that they have no assets. This actually happened to my uncle up in Boston. It’s not a good thing.
@Rex
Don’t sweat the haters. You can put the money you’re saving by renting to good use by joining a country club, leasing that new car you’ve been desiring, or investing in a timeshare.
I have colleagues who rent and would kill for my $1,300 a month mortgage for a house I own inside the loop.
Not to pile on, but, the person who made this comment is off base. Should everyone own? No. But, for those who want to, and who can, the benefits are there.
I lived in a rather “maintenance deferred” garden style apartment complex in the early nineties near HSPVA. With roommate and laughable non-profit organization paycheck I could afford a 2 / 1.5 townhome (400) in the complex (a student friend rented a studio for 165 in same complex), and it was pretty quiet. It’s still there, I checked rents for the TH units – around 850 now. I guess you can still find affordable apartments, but they will not have dishwashers, granite countertops and SS appliances (they may have roaches and funky wall textures to hide cracks). Contemporaneously, a one bedroom with all the amenities at West Creek (gone now) was $550.
Right ZAW, every young college grad should invade the Gulfton ghetto or Greenspoint or Greater Westchase to save a few bucks meanwhile living amongst people with which they have nothing in common, are far from their favorite watering holes/activities, etc…just to live out some Utopian fantasy you have. You think the Greenspoint Arms or the Hacienda on Gulfton offers a decent social outlet with a happening pool, decked out party room, on site gym, wi fi etc? ….That is what a lot of people want–that and something clean. Never mind, what someone should do. Or the Paw Paw advice.
No, JT. I wouldn’t recommend anyone to rent an apartment in Gulfton or Greenspoint. I’m thinking more on the lines of the Energy Corridor, or Greater Uptown, or the East End, or EADO. There are decent apartments in those locations, and they have restaurants and bars that normal people would go to.
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I still think the smart thing to do is buy a condo anyway, instead of renting. Build some equity for God’s sake. And if you have to move away before it makes sense to sell, no big deal. You can rent it out to someone else.
@ ZAW: Buying an old condo isn’t a terrible option over renting an old condo or apartment of like kind (and I’ve owned one myself), but again only if you can realistically be assured that you will live there for a sufficiently long time. The closing costs are not insignificant relative to the value of the mortgage. The association is susceptible to “capture” by a management company and its leadership may be inconsistent or incompetent. Special assessments can be large and unpleasant and they do happen. Repairs happen. The proportion of housing expenses that are unrelated to your mortgage is very high, and if you do need to move then the margin of rental income that you can either keep or use to pay down principal is so limited that its probably not worth your time or effort that you would want to hold a single unit as an investment. The rate of appreciation of an old condo tends to be very slow and often does not adequately reflect the value of the land, if the land is rapidly appreciating, because the land is tied up by an association that has difficulty obtaining quorums, much less agreeing to sell to a developer.
I figure that I broke even on renting after seven years AND a major remodeling project at the end — but only if you don’t place a value on time or effort that I spent on things that an apartment owner would otherwise have been responsible for. If I had needed to move to another city then I would’ve been much more clearly in the red. The only reason that I sold the condo when I did was to make my assets more liquid (in a slow market) in order to cope with a layoff (in a very very down labor market) while I was also financing a start-up business that I was already locked into. The only reason that I did the major remodel was that condos without remodeling weren’t selling quickly at the time because they were competing with foreclosed units. Everything eventually did work out, but my circumstances illustrate a propensity for unfortunate events to correlate with the occurrence of other unfortunate events, and I was smart/responsible/lucky enough to be sitting on a sizable pile of liquid reserves at the outset. Most prospective homeowners (especially younger folks) don’t really think in those terms, though. They don’t consider risks or contingencies very much at all.
I strongly suspect that a surprisingly large proportion of homeowners actually lose economic value on ownership. Its just that the loss is primarily absorbed by their lifestyle in terms of their quality of life rather than in financial accounting terms. I know that that sounds pithy and weak argument in American culture, but after all, let’s not lose sight of the forest from the trees, here: the whole point of any attempt at financial optimization is to enable a person to improve their quality of life. Homeownership should be weighed as a means to an ends, not as ends unto themselves.
This rent v buy argument is really stupid. The vast majority of people who buy homes do so because they have kids. Go knock on doors in the Woodlands, Pearland, Sugar Land and Katy and ask a family of four if they would rather rent a 2 bedroom apartment in Montrose. I suspect the laughter would be robust. And if you knocked on the door of a nice apartment in Montrose and asked a young couple in their 20s if they would rather be living in the suburbs, the laughter would also be vigorous. And then ask the same young couple if they plan on raising a family in their apartment and the laughter would again be substantial. People rent and buy because it suits their lifestyle and not because of any complicated cost benefit analysis. Appreciation inside the loop has priced young people out of the market. So they rent instead. But if you could still buy a bungalow in the Heights for $275k, they would be buying.
True, Niche. But it is important to understand that a house is both an investment and housing. You really can’t compare it to, say, buying stock, for the simple reason that you can’t live in a stock.
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I’m not saying that houses are necessarily good investments. I struggled to break even on my first house; I probably lost money if you count inflation. But something is better than nothing. I still came out ahead of where I’d have been if I had rented all those years. It’s sort of like something a teacher told me in middle school: even if you’re totally not ready for a test, take it: a 40 is a failing grade, but it helps your average more than a 0. I’d rather lose $25,000 on a house than blow $115,000 in rent over eight years, and have nothing to show for it.
@Fernando There is absolutely nothing wrong with putting in a low down payment. In fact depending on the math it may be a terrible idea to put in a large down payment. It’s all about cost of capital. In todays market you only have to beat a 3.7% ROI on the mortgage to justify putting the money somewhere else. Moreoever, maintaining some additional cash reserves reduces cash flow risks, which has it’s own monetary value. Keeping this cash in a semi-liquid state like an index fund may be a far superior choice than paying more down. Granted, the stock market has been incredibly anemic this last year, but in previous years it would have been a huge mistake to put more than the minimum (no PMI) down. Actually for a few years there you could have even absorbed the PMI without an issue.
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There seems to be a lot of fallacies out in the world about debt, like debt is this inherently bad thing. NONSENSE. Properly managed debt is a key to building wealth.
Funny thing is that I agree with some of the stuff the haters are throwing at me. I just think its silly and naive for folks on here to act like home ownership is so easy and it is the no-brainer answer for everyone in Houston. My personal opinion is that multi-generational living is the real answer. It has been a lost art in America except for those fresh off the boat.
@ ZAW: The underlying purpose of executing and/or trading financial instruments is to maximize one’s consumption (including non-pecuniary considerations like the opportunity cost of your leisure time) and/or to smooth consumption over time. To that end, it is important to remember the following: A deed is a financial instrument. A mortgage is a financial instrument. Title insurance is a financial instrument. Property insurance is a financial instrument. A lease is a financial instrument. Common stock is a financial instrument. Cash money is a financial instrument. Various combinations of these (and others, left unstated) can effect the same material outcome at different levels of cost and risk; however, financial instruments are not consumption items or in any way inherently virtuous.
Also, if you believe that you lost $25,000 on a house over eight years (the equivalent of only $260/mo.), you were carrying a mortgage, and you believe that you incurred a small capital loss then I guarantee that you aren’t doing the accounting correctly. You must include all of your housing-related expenses that a landlord would otherwise have paid as part of your cost of ownership.
If I didn’t have a yard to cultivate, the sadness would be overwhelming. And oh, BTW, property taxes and mortgage are TAX DEDUCTIBLE. Somehow I suspect that most Swamplot readers don’t pay income taxes, like 47% of American households.
I rented for 3 years in Montrose for $700/mo when they tried to raise the rent to $800-900 last year I took tiny savings and put 5% down on a property in 77023 that has TWO homes on it. I am renting the back house and a room in the front house, my tenants pay my monthly mortgage, including my PMI! I am working on a refi now to get rid of PMI, and I expect to profit each month from my tenants (well, really just save money for remodeling). My parents helped me but only gave me $5k. My two homes needed some paint and I hired someone on craigslist to replace one room’s ceiling with new sheetrock. Neither homes are fancy but they didn’t need much work! I will remodel the bathrooms and kitchen later this year and next and hold the property once I buy another one in a few years when my future wife demands a home in a better neighborhood. East End is full of development and catalysts to hold or grow in value over the next 5-10+ years. I don’t make six figures at my job and I bought a home well under what my lender said I could afford. I am smart :)
@ Capability: If gardening is one’s treasured pastime then yes owning a plot of land that’s attached to your house is probably the best way of going about it. About tax deductions. 1) They’re deductions, not credits. The cost of interest and property taxes doesn’t just go away, so that means that you still have to estimate for their net effects. 2) You can’t deduct for these items at all if you take the standard deduction. 3) The lower one’s income (net of all other adjustments), the less of an impact that those tax deductions have because they’re deducting income taxed at a lower bracket.
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The value of these deductions is real and should be accounted for but it will vary from household to household and from year to year. Ominously…the sort of year where the deductions wouldn’t amount to much would be the same year in which an owner household is likely to really need the deduction. It goes back to what I said earlier, that bad things tend to correlate with the occurrence of other bad things.
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@ Mike: Buying 2-to-4-unit properties and having roommates is definitely a way to go! In addition to the cash flow, many of the same benefits apply to a property like that as would apply to a typical owner-occupied single-family home. Kudos as well that you anticipate that at some point your household composition will change and that you have a realistic plan. If I were still living in Houston then I’d probably be doing what you’re doing, also where you’re doing it.
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However…being a landlord requires your time, occasional frustration, additional investment, extra reserves for repairs and vacancy, and a fairly high risk of all manner of crazy shit going down in any given year. These are issues that a renter or an ordinary buyer doesn’t have to concern themselves with at all. The gains that you will accrue are mostly entrepreneurial in nature. Its a completely third way — seriously, we might as well be comparing the purchase of a car to a lease of a car and then using the same model to try to justify buying a car in order to become an Uber driver. Its apples to oranges to a jar of apricot jelly.