The Return On Rent Is Always Negative 100%: How To Live For Free

The Return On Rent Is Always Negative 100 Percent - Here's How To Live For Free

There's a lot of debate on whether it's better to rent or own. If you are a renter, I'm sorry to say the return on rent is always negative 100%. You get a place to stay for your rent. But there is no potential financial return on rent as opposed to owning.

After years of renting, you will have nothing to show for your money. Whereas if you own, at least you have a chance of growing your net worth through greater home equity. And based on the history of real estate appreciation, your chances are really high you will build wealth owning.

One of my most important recommendations to build wealth is to at least own your primary residence. This way, you get neutral real estate and inflation. Just like it's not a good idea to short the S&P 500 long term, it's also not a good idea to short the real estate market long term by renting.

Buying My First Property In 2003

I remember when I bought my first 2/2 condo in 2003. I felt a sense of relief that I no longer had to pay ever-rising rents. Even though the $2,300/month mortgage payment was about 15% higher than my previous rent after a 25% down payment, it felt good knowing my costs were generally fixed.

What I've recently realized is that many homeowners over the years have not had to pay a single penny for housing costs. In essence, they've lived for free! Not only have the lived for free, thanks to tremendous home price appreciation, homeowners have also made a tremendous amount of money as well.

Let me show you how homeowners have lived for free with an example. It doesn't involve mooching off your parents as an adult child.

How To Live For Free In An Expensive City

Here's the profile of a 3/2 home that was purchased for $1.3 million in 2011 and sold for $2.2 million in early 2019. He put down 20% and took out a $1,040,000 mortgage at 3.5%. Below are some approximate numbers to highlight the power of homeownership.

Financial Positives Of Homeownership

  • Monthly rent avoided for eight years: $5,500
  • Total rent avoided after eight years: $528,000
  • Net proceeds after fees, principal pay down, all taxes from selling house: $1,100,000

Financial Negatives Of Homeownership

  • Opportunity cost of not investing $260,000 (down payment) in the stock market from 2011 – beginning of 2019 = $286,000 (110% appreciation to $568,000)
  • Net mortgage interest cost after eight years = $203,000
  • Net property taxes after eight years = $90,000
  • Maintenance cost after eight years = $20,000
  • Principal pay down over eight years = $100,000

Net cost of living = ($528,000 + $1,100,000) – ($286,000 – $203,000 – $90,000 – $20,000 – $100,000) = $929,000.

Based on this simple math, not only was my friend's family housing free for eight years but he was also paid $929,000 to live in San Francisco. That's pretty good value for just living.

Obviously, experiencing a 69% appreciation in his property was a big factor in this equation, but so was not having to pay $528,000 in rent during this time period. Further, one can debate whether paying down $100,000 in principal is truly a negative.

Even if the property only appreciated by 3% a year, my friend would still have been paid over $480,000 to live in San Francisco for eight years.

This example is probably similar to hundreds of thousands of homeowners over the years. Now compare the return on rent. There is no comparison.

Related: Reinvestment Ideas After Selling A House

How Much You'll Spend On Rent In Your Lifetime

Check out this chart about how much money you'll spend on rent for a median-priced home in various major cities. The calculate is based of about 10 years, 20 years, 30 years, and 40 years of renting. The figures clearly show the return on rent is always negative.

The total cost to rent in a major city over the years

It's kind of crazy to see that a San Francisco resident would pay $2,468,000 in rent for a median-priced property by the time he or she turns 60. If you see this figure and live in San Francisco, your goal should be to buy your primary residence as soon as you can based on my 30/30/3 home buying rule.

Is your city on the list? If not, add up how much you'll end up spending on rent for your desired property if you never buy. I don't think you'll like the results.

With such massive amounts paid in rent over one's lifetime, is it no wonder why the desire to buy property is so strong? Yes, renters also benefitted during the pandemic due to higher utilization rates by staying inside more. However, the inability to make a profit long term is difficult.

I'd love for property prices to decline by 20% so I can snap up another Golden Gate Heights panoramic view property in San Francisco. Alas, unless I get really lucky, another investment property is not in my cards.

I've reached my limit to the number of rental properties I can manage of four. My remaining cash flow is going toward private real estate funds for 100% passive investing.

Takeaways On Living For Free Through Homeownership

It is amazing that many homeowners have been able to live for free all these years. With the housing market heating up because mortgage rates have plummeted and so many people working from home, housing has become an extremely attractive asset.

Here are some takeaways from this post:

1) The return on rent is always negative 100%.

Yes, you get a place to live, but if you buy, you also get a place to live. Once this variable is canceled out, what's left is the owner's optionality to sell the asset. Who said high school algebra was a useless course.

Tremendous amount of homeowner equity versa mortgage debt outstanding over time - return on rent is always negative

2) It's easier to invest in real estate than stocks.

Although buying a home is making a concentrated bet with leverage, buying a home may ironically be easier than investing the same amount of money in the stock market. This is because you're buying a tangible asset that may improve the quality of your life. With stocks, there is no utility. Further, prices could decline out of the blue.

Given real estate is less risky than stocks, you can ironically make much more from real estate than you can from stocks.

3) Real estate helps with financial discipline.

Renting and investing the difference in the stock market and other assets is a great idea. Unfortunately, most people often fail to do so due to a lack of financial discipline. Without a proper automatic invest strategy in place, chances are high the saved difference gets spent.

Regularly paying a mortgage is one of the easiest ways to save and build wealth. It is called forced savings. Over time, this forced savings adds up.

4) Time is your friend when it comes to owning a property.

Over time, the cost to rent rises to barf-inducing levels. Meanwhile, the appreciation of a property also sometimes rises to unbelievable levels. The only way you can survive as a renter is if rents stay flat or go down. Unfortunately, inflation tends to always push rents higher.

Rising rents and rising property prices will crush your financial progress. Therefore, it's important to at least get neutral real estate by owning your primary residence. You can also relocate to a lower cost of living area.

Large rent increases won't last forever. However, homeowners should hold onto their rental properties to benefit from rising rents.

Rising Rents pushed by rising inflation

5) To live for free, you've got to take risk.

Staying in a rent-controlled apartment is somewhat akin to working at a safe day job with no upward mobility. You'll likely never starve, but you'll likely never get rich either given the return on rent is -100%.

If you take some risk by buying real estate, you might do very well just like if you decided to start your own business or hop to a different employer. Alternatively, you might go bankrupt if you buy inappropriately. At the end of the day, no risk no reward.

6) Living for free strengthens the real estate market further.

Living for free is another phrase for rising home equity. The more home equity there is, the larger the buffer in case of a recession. Given lenders have significantly tightened their lending standards since the 2009 financial crisis, only the most credit worthy borrowers have bought homes.

When you combine high credit worthiness with record high home equity and low mortgage rates, it's hard to see another crash in home prices again. The best we can hope for is a 10% – 15% decline window before another recovery.

American Household Home Equity Record Highs 2019

Arbitraging To Live For Free

Once you own your primary residence, you won't truly know until after you've sold your property whether you lived for free all those years or not. In the meantime, you can make educated estimates every year about whether buying or renting made more sense.

If you really want to live for free in the present, you've got to figure out a way to make investments that will produce income. Once you've got enough passive income to cover all your housing expenses, you are living for free.

The concept of Buy Utility, Rent Luxury (BURL) is one logical strategy. You basically rent in a high cost of living area and invest in real estate in a low cost of living area with a higher rental yield to cover your rent. This can be done through a speciality REIT or through real estate crowdfunding, where I've got 18 different commercial real estate investments.

Aggressively saving money on the short end of an inverted yield curve to cover your longer duration borrowing costs is another strategy, especially when the yield curve is inverted.

But the easiest strategy is to simply not rent for life. If you rent for life, you are going to look back 30 years from now with regret. Your kids will also likely hate you for not buying so long ago.

If you're not willing to build assets for yourself, at least do it for your children. Just make sure the numbers make sense and you can withstand downturns.

Real Estate Recommendations

Now that you know the return on rent is always negative 100 percent, I suggest you buy rental properties. The value of rental income has gone way up. Low interest rates mean more capital is required to generate the same amount of income.

I've bought another rental property during the pandemic because I found a good deal. I'm also building a real estate portfolio for my kids to manage, just in case they can't find gainful employment.

In addition to buying rental properties, you can invest in real estate crowdfunding through Fundrise. Instead of needing to come up with a big down payment, you can invest as little as $500 into a diversified real estate fund. You'll generate passive income and diversify your investment exposure. For most people, investing in a diversified eREIT by Fundrise is the smart way to go.

If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. If you have a lot of capital, you can build your own select real estate fund with individual properties.

Both platforms are free to sign up and explore. 

private real estate investment dashboard

I've personally invested $954,000 in real estate crowdfunding across 18 properties to earn income 100% passively. To build wealth, you must invest. Otherwise, inflation will eat away your purchasing power.

For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. The Return On Rent is a Financial Samurai original post.

164 thoughts on “The Return On Rent Is Always Negative 100%: How To Live For Free”

  1. Sam, if your rent is <15% of your income – does it actually matter in this case? I understand if it's reaching 50% of your income that it may make more sense. I am an expat (not in US) and buying property in a foreign country is not appealing though I have been here for a few years (<5)

  2. These numbers seem high to me, at least for my city. If one rented from age 22 to 30, it would mean an average rent of $1074 a month. I don’t know anyone here who was paying that much in rent a month let alone that age group- most people in that age group get a room, pay $5 to 700? Totally possible to pay similar for a studio if you look around. I paid between $400-550 for a room or small studio in the 2010s. In 2017-18 paid $650/month for a small 1 bedroom (jr 1 bed) in Chinatown, $400 for a room in NoLibs in 2019, $575/mo for a TINY studio in Fishtown in 2020. There are parts of the city you could rent a whole house for that much.

    The other thing to think about is rental arbitrage. When I had the Chinatown studio I regularly rented it out on AirBnB because it was close to the convention center and a couple larger music gigs. I would occasionally crash at a friend’s (or be travelling myself) but usually stayed in a cheaper airbnb somewhere. Made like $10k that year. Would have done it in Fishtown last year but, covid.

    Anyway some thoughts.

  3. The Return on Rent isn’t always zero.

    The return on rent is the difference between a mortgage and the rent cost, invested in your favourite investment, essentially dollar coast averaging (DCA). For me, this is DeFi, where I expect minimum 20% per year on cash equivalents.

    The comparison is against whether than is better than the capital gain you will receive on a house that you live in minus it’s financial drag (interest payments, maintenance, rates etc).

    The house you live in it is not an investment unless you have tenants. You can not compare renting to an investment property, because you still have to live somewhere. Mortgage repayments are just forced savings that you can’t invest.

    In most circumstances, this DCA strategy grows quicker than the equity in the house that you live in.

    1. Bob, you can tell yourself this, but you would only be lying to yourself. You gain ZERO equity/wealth when you rent. There is no guarantee building wealth owning either. However, at least there is a chance.

      Just like shorting the S&P 500 long term isn’t a good idea, shorting the housing market by renting long-term isn’t a good idea as well.

      You’re neutral real estate if you own your primary residence and that’s it. If you want to go long real estate, you need to buy rental properties, REITs, and or private eREITS.

  4. “3/2 home that was purchased for $1.3 million in 2011 and sold for $2.2 million in early 2019.”
    “Net proceeds after fees, principal pay down, all taxes from selling house: $1,100,000”

    Something got distorted in edits of this article, or your simple math was too simple, or the way you adjusted the figures is confusing.

    2.2 – 1.3 = 900k. Subtract another 100 in selling costs. 800k in gains is 300k in taxable income if he’s married, and 550k if he’s single for more than 3 of the last 5 years. The bill on that is at least 25% in CA.

    20k in maintenance costs for 8 years on an San Fran 3/2 is not realistic. Maybe if it were new construction, but at 1.3 that would likely make it a condo, with HOA fees that terrify. You also gave a healthy tax deduction for the mortgage interest and property taxes. Applicable to the time, but non existent in the current tax laws where SALT is limited to 10k and the personal exemption got absorbed into the standard deduction.

    Last, 2011-2019 was a near best case scenario. i did the same, buying at 800 in late 2012 and selling for 1425 in early 2019. Net gain was just under the 500k exclusion, so zero tax bill to me, and quite a profit considering my PITI was less than the combined rents of myself and my now wife.

    The long term history of SF suggests market rents increase at 5%/year, or double inflation. In the decade+ picture, your thesis is well maintained, esp with the lower interest rates of this century. If you can swing the down payment and you want to stay here long term, you’re pretty damn happy after the first decade. Your costs have barely moved. The market renter downtown saw rents go up more than 100%. A renter in a rent controlled apartment also like his rent after 10 years, but only if he’s still happy in the quality of the apartment. There aren’t rent controlled SFHs, and newer apartments are also subject to market rate increases. Just as owning has opportunity costs, so do the tin handcuffs of an apartment. And should the owner ever Ellis Act you, or there is a fire or other disaster, suddenly your cost of living might triple or more. You better be banking that cash flow.

    1. Sorry that it is not more clear. Please re-read the section again given the use of a mortgage and paying down principal over the eight years of ownership. Those are the big items you are missing from your calculation.

      However, you are free to calculate the returns however you want as there are no set variables.

  5. Don’t completely agree with this if you are young, live in a large city and want to retain flexibility to move to other cities for your career.

    Take NYC for example. If you factor in taxes, insurance and the very high maintenance fees, the math does not work out unless you assume the property appreciates in value. Cap rates are so low in these cities that it makes more sense just to rent.

    That said, if you can buy in downturns like 2001/2002 and 2009/2010, then it absolutely makes sense to buy.

  6. Mindy Jollie

    Yikes, that table with the list of rental costs in each city for each age is frightening! That’s far more money than I was thinking in my head. I see your point about finding a way to buy property as soon as possible! I’ll have to look for a property or get a realtor to help.

    1. A.J. Shannon

      To quote Uncle Lou* – “Its amazing what a little time will do”. He meant this regarding investing in the stock market and in a positive way, but the same could be said about the down side of paying rent.

      * Louis Rukeyser – the host of Wall Street Week on PBS every Friday night in the ’90’s.

  7. Santos Capital

    Buy a property in the city then have it rented out while you move to the suburbs and pay a lower rent.

  8. I apologize if this question has already been covered in the comments (I confess I skimmed the bottom half of them). The market seems very hot for sellers in Newark, DE where my boyfriend and I are looking. Currently renting in an odd house (kitchen in the basement?) with the rent reflecting the unique layout of the house. At this point I would like to buy because I want to have a dog and it seems very difficult without lying to have a dog in a lower cost rental. This is a college town and I understand the perceived fear of irresponsible college aged students with large dogs causing property damage or problems with neighbors. I’m concerned the housing market will turn soon, in less than five years, and leave us underwater on a mortgage. We could have the 20% down payment in a year but it would drain the majority of our savings (not including my retirement funds). I also have concerns about the real estate management company raising rent.

    What would you recommend in my situation? Start looking for a house? Start looking for a different pet friendly rental? Keep saving coins and wait for a change in the market? Or all of the above?

  9. Liz,

    I was in the same situation that you are now, 3 years ago. After renting for 15+ years in different countries we (myself and my husband) decided that we needed to make a change. At that time we were living in a new 120m2 loft.

    Unfortunately, despite of another reader’s reaction, 120m2 was too much space for us – not to mention the monthly utilities costs when living in lofts with high ceilings!

    On top of that the rent was €1700 +parking €75 + all the other costs. The landlord did not want to sell either in the near future. :)

    We were then faced with a dilemma. I wanted the same modern Scandinavian finish in a smaller apartment. We could not afford to buy a loft and could not find anything smaller to my taste without doing some work.

    On top of that, as I have my own business – I did not have time to follow up with potential renovations. Time is money and being away from my desk is a loss.

    The only alternative option for us was to buy a 70m2 apartment that was being built at that time. We had 210k from the bank with a 2.2% interest and a monthly pay back of €900.This was a significant lower figure for us, from the initial €1700 we paid for rent.

    I used an extra 20k from savings to get those high finishes on quality materials and all A+ appliances.

    The other day a friend of mine asked if we are interested to rent, and made an offer of €1200/month + charges.

    1/2 years later, the apartments that are built now in the same area as we are, sell for €240 k for the same m2 and basic set up.

    Was this a good choice financially? I am not as financially literate as some readers here.

    What I know for sure is that we now have a place that we call “home”, looks great and it fitted with our personal circumstances at that time.

    Perhaps I should mention we live in Brussels.

    Apologise for the language mistakes, EN is my third language. :)

  10. Currently renting in NYC and 50% of my income goes toward rent. I make ~$2400 per month and my portion of rent in a shared 3bed2bath is $1200. In the back of my mind, I always knew that paying so much for rent is not financially logical but my justification is living in NYC >> suburb of northern Virginia with parents. To my best effort I have managed to put ~$3000 in a 2.1% APY savings account. I’m debating on whether I should invest the $ with a roboadvisor service or maybe Fundrise. Alternatively I could leave the savings where it is for a rainy day. What do you think would be a good decision for my situation?

  11. Steven Polit

    A recent release from ATTOM Data solutions, a property data provider, shows that the median home prices are unaffordable to wage workers in 71% of U.S counties. This startling conclusion was reached by comparing wage data from the Bureau of Labor Statistics to the income required to meet mortgage expenses on a median priced home.

  12. This looks great. The problem I have is being in the military and moving every 3 years. I have seen people get burned buying and selling that quickly. Buying, holding, and renting out is difficult as well and what if it is not rented. With 9 years left in military, I think our best bet is to wait to know where we are going to settle before buying. Thoughts?

    1. Since you are military, i would recommend looking into a VA loan to acquire a duplex/quad that you can live in and rent at the same time. Living in one unit and renting the other is a great way to offset your own out of pocket costs allowing you to save more while still benefiting from the rise in rents/house prices. When you move in 3 years, simply rent the unit you were living in and find a reputable management company in your area to manage it for you when you’re gone (Usually costs 8-10% of gross rents). This route allows you to acquire a great rental property for little to no cash down (VA Loan), should provide some solid cash flow, and allow you to gain exposure to the RE market.

      Obviously, this requires you to be able to find a place in your current location (which may not always have the best market) but can provide huge benefits in the long run considering the lack of cash as a down payment.

    2. I used to live near a large overseas Navy installation and became friends with quite a few service members.

      I know a family that bought a house at every PCS and kept them. They are on their way to becoming financially well-off.

      Basic rule of thumb: only buy a house that you are willing to have your family live in. Odds are there will be many service members behind you willing to rent your property after you PCS.

  13. How do property taxes factor in? I was renting a place for $1,000/month in the Chicago Suburbs. Now I own and my taxes are $8,500 per year. Essentially 70% of what I was paying to live last year is now just “wasted” on taxes and I still have to pay a mortgage. What am I missing?

    1. That’s just the premium you have to pay to live in such an amazing city. I mean, someone has to fund the coroner. It’s not free for him to scoop up the 1000 murder victims every year.

  14. Where I’m from the average house price is 48000. The average household income per annum is $22000. Rent is 600+.

    Banks don’t do mortgages on houses under 50k. Sellers want cash. No family earning 22k a year and paying 600 a month rent can afford to buy.


  15. I appreciate the post, and I think it is generally true for most parts of the US. The one thing I’d be careful of is relying on an example that starts in 2011, when we had historically abnormal returns in both SF real estate and the stock market. At 40x price to rent, the calculation becomes a little closer..

    To me, real estate is a classic internal rate of return/IRR finance problem. You have to cash outflow a down payment and other buying costs now, but then cash inflow the benefit over time with saved rent, tax breaks, and future appreciation on a sale. By inputting all the relevant inflows/outflows associated with a house, one can estimate the IRR of the cash put down for the down payment. Nice and theoretically clean – (shameless plug) my most recent blog post from two weekends ago updated my spreadsheet on buying a house for the TCJA changes.

    By the way, I’m totally on board with the rationale in prior posts about owning real estate as a hedge against future living costs – being neutral rather than short for the long run.

  16. The net proceeds and the ‘rent avoided’ are a bit confusing to me. Maybe I’m just missing it.

    Is net proceeds after costs and deducting remaining mortgage, or does that also net out any principal you paid on a monthly basis?

    For rent avoided, is that rent minus monthly principal payments or just rent?

    Effectively, you have to account for monthly principal payments somewhere if you compare against rent. Rent vs. (interest+tax+maint.+principal payments). Principal payments won’t be gigantic in 8 years of course, just wasn’t sure if it’s accounted for.

  17. Sam,

    There is something wrong with this analysis.

    a). I calculate the monthly payments (mortgage + insurance + property tax + maintenance – tax write-off) to be $4,776.

    b). I see that a 2 bedroom apartment rental in the same area averages $3,100 per month, in addition to the $260,000 down payment, a renter would have an extra $1676 to invest every month.

    c). If the renter invested this down payment money along with his monthly cost savings in any number of stocks on the DOW or S&P 500 he would have a total investment near $2,000,000 dollars (I used MSFT as a blue-chip stock example for my calculation), this offsets the benefit of buying a home. Over 8 years his rent only cost $300,000 netting him $1,700,000 on his investment of free capital.

    d). The renter did not need to leverage money in order to grow his net worth; this results in reducing his downside risk if either the stock market or housing market were to go sideways or down.

    e). Avoiding a housing purchase also allows for the renter to relocate for better career opportunities as they become available; this has an added benefit of lower/zero state income taxes on his capital gains if he waits to sell his stock investment after relocation.

    1. I like your point d.

      They avoided rent on a three bedroom, two bath home.

      A 2/2 was my condo example.

      How’s it going with you? Love to hear your situation between renting and owning.

      1. Sam,

        Even if we add another bedroom, that would be a wash. Consider the dividend payments associated with owning a stock/index for 8 years. Sticking with my previous example, the dividend yield on MSFT is 1.5%/yr, that would provide an additional $2,500/mo of income at the capital gains tax rate (could easily pay for another 1 bedroom apartment).

        Things are going great for me, I have a month-to-month lease at a below average market rate in LA. Just had a clogged sink in the kitchen last night and a plumber was there within 20 minutes to fix it! I feel sorry for the millennials paying $1M + for a 3 bedroom 1960’s style house, if only they did the math before jumping into single family residential real estate.

          1. Yes, I’m extremely happy with my choice to rent. And as happy as my landlord may be, I’m sure your friend’s real estate agent was even happier with the commission on the $2.3M sale.

            Everything rational may not be logical.

      2. I have a friend who has his primary home if Florida but spends the summer in Minneapolis. Really high property taxes in MN. So instead of buying $1 million condo he kept the money in his brokerage account and rented a nice apartment down town MINNEAPOLIS for $4500 per month.
        He says the return on his $1 million in his brokerage account plus the flexibility to move at the end of the lease is better than buying at age 65.
        Your thoughts

  18. How many SF renters have almost 5 years of rent saved for a down payment?

    Or anywhere for that matter. 20% net savings will get you there in about 8 years without any retirement contributions. That’s the depressing reality math instead of the unicorn math.

  19. Hello FS,

    Other personal finance bloggers such as Go Curry Cracker actually implore their readers to rent instead of buy as houses can change a lot in value and you can lose money even over the long-term compared to renting:

    I personally like renting because I hate having to fix stuff and I see it as a waste of time. But when I decide to have a family in 5-10 years, I’m torn as to whether having a “forever” house is a better investment; especially if that residence is a townhome where a homeowner’s association takes care of any repairs…

    Would you say that timing the real-estate market correctly during a slight downturn is more cost-effective in coastal cities compared to the midwest, where you have a greater chance of making money on your house and “living free” compared to a house in suburban Michigan for example? Property taxes can be quite high in the bay, but I imagine that if you choose the right area in SF or Palo Alto for example, your investment can appreciate nicely and even make you money despite the yearly tax cost.

    1. Everybody has their opinion and can do what they want to.

      If I missed out on the massive Seattle property marked boom, I probably would stick to believing renting his best forever as well.

      I think most Americans would like to live or retire in America. GCC are happy to live in Taipei, which is a great city with awesome food and a much lower cost of living.

      But I venture to guess that most people would be unwilling to retire in Taipei or Thailand or wherever it’s much cheaper. I don’t think anybody wants to feel forced to have to live outside of the country to save on living expenses.

      Having options due to having more wealth is a much better situation IMO.

      1. Thanks FS! Couldn’t agree more.

        I travel constantly and having that leverage to pickup and move as a single guy to increase my net worth (and salary) through promotions and other opportunities is what values to me right now so I happily rent. But when I have a family in say, 5-10 years time, priorities change and I will be looking at housing.

        If I can invest in a property now and see it appreciate until I’m ready to finally settle down in a home, even better.

      2. Money Ronin

        As an aside, Taipei is one of those crazy markets where it is far cheaper to rent than to buy. It is also more susceptible to geopolitical winds (i.e., Chinese missile tests, fly-overs, etc.) and economic cycles which impact prices.

        As with any market, you need to consider how long you will stay and pricing volatility in your purchase decision. During 2008/2009 in SoCal, depending on where you owned, prices dropped anywhere from 15% to 50%. Wealthy people are better able to ride out the storm and not flood the market with foreclosures. I have a friend who bought a house at peak prices in the fringes of San Bernardino County in a new development. He walked away from his house at the trough. It wasn’t the most ethical thing to do (because he could afford the payments) but it was the right financial decision–he was hopelessly underwater.

        1. The thing is, it’s not just Taipei where it’s cheaper to rent. Some Bay Area cities have crazy price-to-rent ratios, Palo Alto is about 40:1, which means that your effective yield on capital is 1.4% (100/40=2.5% minus property tax = 1.4%).

          Trulia is saying it’s now 12% cheaper in San Jose and 5.8% cheaper in San Francisco to rent than to buy.

          What was true in 2012 is not necessarily true in 2019

  20. My problem is I feel paralyzed. I currently live with my gf and we split the rent here in San Diego. My portion is $1115/mo. I own a business where my gross income was $211k last year and will probably go up this year given it’s my third year in.

    My monthly expenses total to $5k +\- $200 which includes rent and $1k/mo child support for my son who lives in N. Idaho. Also included in that number is our Heath insurance which is $704/mo for me and my boy.

    I’ve got $130k siting in a high yield checking Acct at 2.33% and the rest in Sep IRA, Roth, and brokerage accts. Fico is 800+. I want to move to Idaho to be with my son and housing prices are so much cheaper there but at the same time feel I’m saving so much In rent that to buy a place up there which has everything I want would cost me a $2k + Mortgage before PITI.

    I’m trying to get $200k in cash so I’d have 3 years worth of living expenses as a cushion to last me through any recession. Given my line of work, it is not unrealistic to have a $150k quarter in income with minuscule overhead. So, the business is almost pure profit.

    Slap some sense into me or paint a scenario to make me see the light. Median housing in Idaho is about $250k where I’d want to live which is either Sandpoint or Coeur D’Alene. I’d like to buy in the $400-$500k range as that covers all the bases.

    1. Money Ronin

      I have a friend who is (early) retiring this month and moving from LA to Idaho with his wife and 2 kids (all CA natives). He has never owned a house before but has purchased a very nice one in Idaho–one that he could never afford in LA.

      Since you’d like to be with your son in Idaho, you should consider a third option of renting in Idaho. I would imagine that rents are proportionally cheap.

      Although I’ve never invested in Idaho, I have enough nationwide investing experience to consider the following:

      1. I doubt that Idaho appreciation can keep up with CA. As much as I can attest to what the Financial Samurai has written, it does not apply to every market and at all times.
      2. What is the price volatility of your desired Idaho market? If prices fall, how much will they fall? In my Midwest investing experience, prices effectively fell to zero in some places–the city was practically giving away foreclosed homes to people who would spend the money to fix them up.
      3. Is the market going up or down? Certain markets like NYC and SF have turned.
      4. What are external factors affecting the town? My friend is one of many Californians moving into that city and driving up prices. Will you miss the boat if you don’t buy now?

      3 years of safety cushion seems excessive. If your income disappeared, wouldn’t you do everything you can do to lower your expenses including renting a small place in Idaho? Your $5000 monthly expense might be half that in Idaho.

  21. Darius Ogloza

    My wife and I pulled off a similar “trick” as the one you describe by purchasing a house in Davis CA when our son went to school there. We purchased a four bedroom in central Davis for $425,000 in late 2010. We received about $1,925 in monthly rent while our son lived there. Since then, we have been receiving $2,765 monthly in rent. The property is worth somewhere in the vicinity of $700,000 to $750,000 in today’s market. In short, we made money sending one kid off the college.

  22. Great article. I make a low six figures in NYC and I simply cannot buy anything here. There are some areas in the boroughs that may be possible, but then my commute is 90 minutes plus.

    I do want to buy rental property in the Midwest or the South, but as long as I live in NYC, I cannot see myself buying a primary residence without some strange windfall–which I don’t expect!

  23. but how do we know this trend will go on for the next years? real estate prices reached again a crazy levels in many places in the world, can that be sustained? what if another 2018-like crash is around the corner?

    my questions might be, is it better to waste money in rent and wait till I can buy cheaper, or buy avoiding rents but having maybe a setback in a few years from now?


  24. The key point in making money off selling the real estate is being able to hold on for many years. Otherwise, there are very high transaction costs on both the purchase and sale. You get a lot of upside in the geos that are most expensive to live in (SF, NYC, DC) so you really need to know you can afford to stay there (you just wrote a post about how you need $300k to be middle class:)). You also need to come up with the very high initial buy-in — in NYC down payments of more than 20%, as much as 50%, or all cash purchases are not uncommon. Many of the units are coops which require Board approval, and for desirable buildings, approval requires additional liquid holdings (retirement assets don’t count) of 1, 2 or more years worth of monthly payments. So there are reasonable reasons why even the most disciplined saver doesn’t enter the real estate market in an expensive city.

  25. Financially Frugal

    Example for Madison, WI. This is a highly desirable area in the heartland (named to Forbes ten best cities multiple times in past decade). A few things affecting local prices: the isthmus creates a natural squeeze on available property in close proximity to the Capital and a slow-and-steady influx of young professionals working in tech and biotech keeps prices moving up. Property taxes are also high. Currently renting a small 1/1 apartment with grad student neighbors and happy with the decision. Using a “luxury” 1/1 condo in same area for comparison. (there is no non-luxury RE for purchase in this neighborhood) Results are forward projections.

    Location: 5 min walk to work and 10 to center of downtown
    Able to save or invest the $850 monthly delta between PITI and renting
    Opportunity cost of current $95,000 at 5% return over next 5 years is $121K

    Net saved cash is $51K plus $26K of opportunity cost gains = $77K
    Total cash plus investments = $198K

    Monthly rent: $850 accounts for 1.25% yearly increases based on past couple years raises (ALL utilities included)
    Total rent over 5 years: $51,000

    $270K condo purchase price with 35% down payment yields $1,500 monthly for PITI before utilities

    Broken down
    Principal increase: $18,000
    Mortgage interest: $29,000
    Net property tax after 5 years: $24,500
    HOA dues after 5 years: $13,200
    Maintenance cost estimate: $1,000

    Purchasing this condo I would need nearly 7% yearly price appreciation just to break even to my current living situation.

    Sale price of $365K less 5% for commission = $346,750
    Pay down $18K in principal based on 3.5% loan amort 30 years leaves $157K loan balance
    $346,750 minus $157,000 = $189,750

    It’s roughly a $10,000 difference to live in the same neighborhood. Yes the condo is a little bigger and nicer, but I’m giving up liquidity. I’m much less concerned about earning 5% annually in non-RE investments than 7% annually on a condo. Disclosure: IF I were to live in a newly built luxury apartment the numbers would probably favor owning.

  26. Sam, I’m getting numbers that are about $391K apart from what you have. Perhaps we could compare math and see where the discrepancy is. Under my calculation, the net gain from buying should only be $602K, not $941K. If you want to be generous and count tax savings, the savings are $735K, still a nontrivial difference.

    “Net proceeds after fees, principal pay down, all taxes from selling house: $1,100,000”

    I assumed realtor sale costs 5% of $2.2M, or $110K, for selling your house. I also ignored closing costs on both ends.

    You pay 15 + 3.8% + 9.3% = 28.1% long term capital gains on the $790K gain for $222K. Let’s assume since you can afford this monster $4,670 monthly payment, this person makes a little over $200K. Maybe you can exclude 250K of that gain, maybe not (we don’t know if this is the first and only sale exclusion).

    You get 2.2M at sale -110K – 222K – 859,000 loan to pay off = $1009K proceeds. Since you didn’t count the principal paydown below, that’s another 181K cash paid into the mortgage = 828K.

    Using mortgage amortization


    > Opportunity cost of not investing $260,000 (down payment) in the stock market from 2011 – 2019 = $286,000 (110% appreciation to $568,000)

    The S&P 500 had a total return of 137% from January 2011 to January 2019. This means the actual opportunity cost is actually $356,000 (you can argue you need to reduce this by the same capital gains rate, or not, since you can just not sell this stock).

    > Net mortgage interest cost after eight years = $203,000
    According to the amortization calculator, after exactly 8 years of payments, this is $267K not $203K.

    Total payments equalled $448K, or $270K interest and $178K paydown.

    So overall your buying picture is too rosy by $67K+$272K=$339K.

    Let’s say you take into some tax deductions at a marginal rate of 28%+9.3% (this payer is in AMT for these years pre-TCJA) = 37.3% deductibility of property tax and mortgage interest = .373*(90+267)=$133K tax savings.

    Finally, you are using the absolute boom times in one of the best cities for real estate returns. Your recent article about 2019 IPOs seems to portend a housing slowdown in San Francisco despite a huge capital injection, or at least alleviate concerns about another massive price pump. You were actually quoted in an SFGate article.

    Trulia is saying it’s now 12% cheaper in San Jose and 5.8% cheaper in San Francisco to rent than to buy. With some Bay Area cities approaching 1.5% effective yield (house price is 40x the rental price in places like Palo Alto for 2.5%, plus 1.2% property tax), renting doesn’t look so bad after all. I know the situation is less dire in SF proper with the usual ratio being 25-30x.

    Finally, there’s the opposite of the best case cherry-pick: The worst case cherry-pick. If you bought a property for $300K in January 2006 and selling it for $220K in January 2006 (Las Vegas), starting off with a 6% 30-year (average at the time). Even if you refinance you’re definitely in the hole.

    Anyway, fascinating article. I still think there’s a crossover point, and it’s probably near 30x home value to rent ratio. You can imagine if we hit 50x, the math would be clearly different. $2 mil to buy or $40,000 a year to rent?

    1. This seems more reasonable. 1) you account for principal paid into the house during ownership and 2) you present a counter example to a single instance in an extremely space constrained city that has arguably had the best recovery since the recession (with the likes of NYC and Seattle).

      Sure the article is back of the envelope, it’s just not clear how actually useful it is to anyone to apply this lesson to life in general.

  27. People do not rent the same places that they would buy. Humans buy bigger (i.e. more expensive). Anyone that tells you different… is lying.

    Owning is indeed more expensive – anyway you slice it.

  28. I’m just about to turn 26, Brit living in Vancouver and I just don’t see how people afford to buy houses here. The only way it seem’s to afford a house these days is somewhere in the countryside, either that or a place in the suburbs and have to commute long distances every day.

    Generation Rent it seem’s to be these days, but by necessity sometimes

    1. I cannot name three world class companies that pay the income levels required to support the median home price in Vancouver, which is higher than San Francisco’s. Yet there are so many big companies here paying big bucks.

      San Francisco is cheap when you factor in incomes.

      1. Maybe true as Vancouver companies dont pay much and given the astronomical prices they have for real estate..

  29. I was very surprised by the results for my house in Houston, TX that we bought in 1994 for $75K and is now worth $220K today. I figured buying was a slam dunk, but the numbers showed renting would have been better. I guess over long term stock market does much better than housing except in few exceptions like San Francisco.

    Total rent avoided after 25 years: $32,000
    Net proceeds after fees from selling house: $207,000

    Opportunity cost of not investing $15,000 (down payment) in the stock market from 1994 – 2019 = $130,800 (872% appreciation)
    mortgage interest = $69,000 (original 9%, refinanced twice to 7% and 5.5%)
    property taxes = $53,000
    Maintenance cost = $36,000
    Home Insurance Cost = $26,000

    Net cost of living= -$75,800

    1. I knew something had to be wrong. Corrected below. Buying was the right decision.

      Total rent avoided after 25 years: $380,000
      Net proceeds after fees from selling house: $207,000

      Opportunity cost of not investing $15,000 (down payment) in the stock market from 1994 – 2019 = $130,800 (872% appreciation)
      mortgage interest = $69,000 (original 9%, refinanced twice to 7% and 5.5%)
      property taxes = $53,000
      Maintenance cost = $36,000
      Home Insurance Cost = $26,000

      Net cost of living= +$272,200

      1. Really cool to see readers do the math and have other readers check the math.

        I screw my math up on occasion too and it is very helpful for readers to point it out as well as typos/grammar issues etc. The Financial Samurai Forum and this website seriously is one of the best ways to improve and learn.

        These big financial decisions are just too important not to be carefully scrutinized by others!

    2. Total rent avoided only $32,000 in 25 years? I think you may have forgot to multiply by 12 to get the annual amount

  30. when factoring the opportunity cost into the net cost of living equation, why do you exclude the initial down payment? the renter still owns the initial investment of 260k so why not use -568k (investment and appreciation) instead of just just the appreciation amount?

  31. So to live for free, basically buy at the rock bottom of real estate market values 8 years ago and then sell for 70% gain. Brilliant idea. Ok Sam, I’m being a little sarcastic but when you use a click-bait-y title like that, the example you use (which many would consider aberrant and somewhat lucky) deserves an eye-roll. That being said, the point you make about rent being a -100% return is worth driving home in the rent vs buy debate. Renting for life is a guaranteed loss unless you’re one of the few who makes a high income, rents way below their means, and actually does invest the difference consistently. My wife and I were paying $1000/month rent in Chicago before we bought our 2-flat and even though our mortgage is higher, we have already made a 90-100% unrealized return on our initial 10% down payment via appreciation. Leverage is great when it works for you.

  32. I thought this was a great insight:
    “When you combine high credit worthiness with record high home equity and low mortgage rates, it’s hard to see another crash in home prices again. The best we can hope for is a 10% – 15% decline window before another recovery.”

    One question I had on this was, if there is a significant rise in interest rates (say home mortgage rates go to 6.5% or 7% — not unheard of by recent historical standards), does this make homes at the higher end of the spectrum unaffordable to those upper middle strivers who are already stretching themselves with a $1.5m – $2m purchase (e.g., Bay Area, Seattle, NY Metro area)? If that happens, could we see a bigger drop than 10% – 15%?

    – Monthly payments on a 30-year mortgage for $1m at 4% are $4,774
    – At 7% rates, to get down to a monthly payment of $4,777 on a 30-year mortgage, you’d have to reduce your borrowing to $718k.

    If we’re basing the potential price drop analysis on the comparable level of affordability, That implies a 3% rise in interest rates could lead to a 28% drop in values!

    I suppose, too, that if cheap borrowing ever comes to an end, we’ll have bigger problems within our economy. For example, all those highly levered private equity-owned portfolio companies could go belly up.

    I’m probably over-stating the problem here but wondering your thoughts. Thanks for all that you do for us Sam!

    1. I am in the low interest rates for longer camp… actually, for life.. ever since I started FS. My low interest rate stance is one of the reasons why I’ve been so bullish on real estate for a while now.

      The Fed has already pushed their rate hikes to the max.. they must see what the bond market is telling us, and it is saying stop.

      1. Understood. This is probably a very reasonable guiding principle based on the last 20 years or so of Fed policy history. I guess I’m just trying to account for worst-case scenarios wrt a jump in interest rates, but, what’s the point of that when such scenarios appear to have only a remote possibility of coming to fruition. Is that a fair reading of your take?

  33. Isn’t the title a lie? Rent lets you avoid the cost of capital or the opportunity cost associated with a residence. The actual answer varies depending on interest if cost of capital, assumed return if opportunity cost, and cost of living in your area. CNBC says owning is more expensive everywhere in the US:

    Also, you have maintenance to deal with as an owner including emergencies like a furnace (rare) or day-to-day such as mowing the lawn. As a lifetime renter, I’d rather not deal with that.

    1. If you think the title is a lie, feel free to prove there is a return on your rent each month. Run the numbers.

      This is Financial Samurai not CNBC where most writers are journalists, not finance veterans.

      Your statement does give me hope for the future though about being able to hire a bunch of writers to write under the Financial Samurai brand.

      1. You said negative 100% though which is clearly not the case. I believe it is negative though.

        In my area I rent a room for $660/month // $8k/year. You can’t buy real estate in that kind of units so let’s go with my whole apartment $2k/mo. // $24k/year. Renters insurance is about $200 a year but it’s negligible so we won’t count it.

        My area is Watertown, MA, USA. The median home in this area is $725k. I think the lowest end home is $408k and this is comparable to my apartment. 10-year fixed looks like the cheapest loan, 3.4%. I will also need 1.9% for owner-occupied Watertown property tax and 1% for maintenance. Principal doesn’t count against me, only interest does. Property insurance is $1200/year average for MA. That’s negligible so we won’t count it either. We need to come up with an assumed return. I will just choose 3.4% to make the math easy. I get 6.3% of total cost times $408k is $25.7k of costs. So it comes out slightly behind renting. Your ROI for renting is +7% (you save 1.7k over owning).

        I should point out that Watertown, MA, USA is one of the highest cost areas for real estate in the USA. Readers should do their own calculations. I think it will be in the -10 to +10% range for most areas and certainly not -100%.

        1. Got it. So after you pay $660/month for a room, what is your financial return on $660?

          Also, What age are you going to still be renting a room? It helps to have some background.

          My general theory is that renters who rent out of choice or circumstance will always believe renting is the best way and vice versa. It’s just our biases at work.

          Hope running the numbers can remove these biases.

  34. Chiming in from Minneapolis.

    Period 11/13 > 3/19

    Monthly rent: $1200 + 3% YOY increases
    Total rent avoided: $68k
    Net proceeds from house: $330k – $20k – $41k = $269k
    Total: $337k

    Opportunity cost: $6k
    Net mortgage interest: $36k
    Net property taxes: $14k
    Maintenance costs: $26k
    Total: $82k

    Net: $255k


    I don’t think my wife and I would have lasted very long in our 2/1 apartment while having 3 kids over this time frame. So likely, the avoidable rent would have been higher at $1400 – $1600 per month.

    Opportunity cost is quite low because we made a small down payment. I think it should be higher because we used cash that would have been put in the market into the house for repairs instead. This was a fixer-upper so I treated the house as an investment.

  35. Renting vs Buying….no absolute winners. Its all based on many variables so in my view blanket statements are not in order. 15 years ago I bought my Stony Brook come for 350k……and sold it for 740k. New buyer has cost basis of 740k and house is now worth 550k.

  36. Tripplefiguy

    I’m curious about how this article agrees with the great article by Jim Collins

    He makes a pretty darn good argument.

    1. It’s a good article, but Jim sold in 2012, literally at the bottom of this most recent cycle and never got back in. I think most of us would be very negative real estate as well if so.

      It’s important for readers to realize the writer’s position and timing. In my case, I’m still long property, but I also sold one important rental in 2017 and have also written cautionary posts about real estate as well.

      We did see a correction 2018, but we’re now seeing a recovery in many cities in 2019 w/ rates back down and the S&P 500 back up.

      1. 2018 wasn’t a correction, it was a temporary slowdown. The fact that even slight rate increases stalled the market shows just how on the wire this whole house of cards is. Very likely when things do turn down, there will be a moderate tumble.

  37. The last 10 years was nice for SF real estate. From the POV of someone looking to buy a home in the next couple years, I’m not that sure I could bank on similar appreciation happening again. I think the best strategy going forward is to diversify into different real estate markets.

    Also, renting gives you career flexibility, which may be difficult to factor in these rent vs own calculations.

    1. I’m not sure folks are aware but the last 7-9 years has been nice in the majority of cities in America, not just SF.

      With so much home equity built by millions of people, it’s just hard to see a massive downturn like we saw in 2007-2010.

      How are your numbers looking when you do the math?

      1. I don’t know why you’re citing home equity as a reason to avoid a downturn. I agree any downturn won’t be as big as 2008, but there was a lot of paper equity generated during the 2001-2006 boom that just dissipated. People will need to move, buyers have increasingly thin funds and are stretching to buy properties, the financial security of people buying 2017-present is much less secure than the folks who got a 30 year, 3.25 when prices bottomed out.

        A 15-20, even possibly 25 percent correction when there’s a broader economic downturn is not unfathomable. Current prices are severely overvalued by historical standards (though not as bad as 2006).

        1. I think the amount of home equity is significant because the buffer is huge unlike in 2007. When only the highest credit scores are getting a mortgage, you’ve read it out a lot of weekends who shouldn’t have bought property because they put no money down and really couldn’t afford it.

          And then you combine the massive equity that has been gained over the past seven years and it’s just hard to see a correction of more than 20%.

          How about you? What’s your story. I wish commenters could share more about their backgrounds so we have an idea of where they’re coming from.

          1. The equity is arguably huge from the insane price gains, I grant you that, but I’m not sure I understand how that helps protect the market. New entrants are suffering due to those gains, and until they all find buyers, that equity is simply on paper. Credit standards are better than 2006, I grant you that, but at the same time, they’re also not “the highest credit scores”, at least not in the last five years. When I sold both of my properties, offers were abundant with 5% or even less down, and paltry pre-approval amounts.

            I’m not sure why my story has anything to do with my economic analysis, but happy to share. I’ve sold two homes (condo then house) that I bought post-bust in the working class suburbs of Boston. I’ve made ~$150k on it all, and have very healthy savings, no debt, and am part of a DINK >$200k household. I see so much stretching to afford at today’s prices, that even a hint of economic uncertainty is going to cause a lot of hardship. Prices are so far beyond incomes here, I’m content with renting at a very reasonable price, especially since the housing stock here is so old and needs so much maintenance. In the event a correction doesn’t come, I’m prepared to relocate to a lower COL city (there’s one in mind I prefer).

            That said, I agree with you that any correction >20% will be tough without a big lynchpin to cause it all like 2008. 15-20 does seem very plausible to me though, when you consider every year the pool of buyers is only adding in more student loan burdened buyers that cannot afford 20% down payments on inflated property values.

            1. Let me just say, San Francisco markets are not the same as the rest of the country. Period.

              This article is laughable. Oh if you bought in SF in 2009, great! yea so obviously the sky is always blue and RE always triples in price. I am dumping my 5 million into any RE I can find tommorow, has to be a good deal.

  38. You give an example in the most extreme market in your favor of writing the article. Do the same thing in 2002-2006 and you lost a ton. Do the same thing next year and you might the same. This only works if housing appreciates at an insane amount. I have family in Boston renting. Renting gives you flexibility to move. Flexibility to leave at anytime regardless if market tanked the second after you bought. It’s not always bad. If market flat lined for 8 years you’d be down.

  39. Damn Millennial

    Perspective from Colorado is that I completely agree…IF you are responsible with money to begin with.

    The big trouble I see with others and housing is having only the down payment for a home and not to much else in other assets. Then WHEN the market corrects, someone is laid off, etc they have to sell. If you can stay on the ride you will come out well ahead.

    When you are focused and a big time saver being a home owner is great. I own a property in Denver and in western Colorado (rental). For me it is not if I will buy more but instead thinking through overall debt levels and strategy.

    Most other friends my age who are renting generally drink and party on weekends, or are busting their butt to save a down payment.


  40. Here is another take on this from a foreigner.
    I bought a house in Perth Western Australia in 2000 for 550k.
    In 1998 invested in a local fund manager 500k.
    Now the house is worth about 1.7m and the fund is over 5.0m.
    I paid cash for both but even with gearing the fund has done much better with no work from me.
    Picking a house in San Francisco is probable as biased as me picking a local fund manager that happened to do very well over the last 20 years.
    Dont get me wrong I total agree with you that going short property is usually a bad lifetime decision but it doesn’t always workout like your example above.

    1. Sorry your house has been such an underperformer. At least you created some good memories? How would your house have done if you bought in Sydney or Melbourne you think?

      Also, how big of a correction in the Aussie housing market do you expect? Things are looking -10% so far no?

      I’ve just used SF as an example. The majority of cities in the US have done very well over the past 7-9 years. Denver and Dallas, for example, are up 50% beyond their previous pre-housing crisis peaks.

      1. Sydney and Melbourne would have done much better.
        I have an investment property in Melbourne which I could have used.
        Bought in 2007 for 555k now well over 1m.
        I used Perth because I happen to live here.
        Perth is quiet volatile being mainly influenced buy Iron ore and Gas prices, we had a massive run-up in price into 2007 then a big downturn which we haven’t fully recovered from.
        Sydney and Melbourne have been experiencing a downturn after a big run-up over the last 6-7 years, probably closer to 15% depending on the area, the industry is saying improvements by the end of the year, auction rates have been improving this year for the first time in a year, I think it has further to run but who knows its a complex question.

  41. As others have noted, this basically works out to “highly levered bet on an asset that appreciated greatly” really pays off!

    Earlier in my life I lived in 4 countries and 10 different apartments. Transaction costs of buying and selling alone would have murdered my on that. I had a high savings rate throughout.

    After marriage my SO wanted to buy a place, so we did (east coast suburbs). We’ve been here for 6 years, so :

    monthly rent avoided: $3800k
    total rent avoided: $274k
    appreciation minus transaction costs to sell: $150k

    Benefit: 424k

    downpayment oppty cost: $130k
    property taxes: $74k
    maintenance + improvements: $111k + hundreds of hours of my time
    interest + insurance: $80k
    HOA: $3k

    Cost: $398k

    So even valuing my time at nothing, I’m only getting “paid” about $4k a year to own.

    I guess the moral of the story is, get market timing right and lever up!

    1. Thanks for sharing. Where was this house located?

      The question is: Would you have invested the entire down payment in the stock market all this time?

      This seems like the obvious solution, but for some reason any Americans do not do this.

      In this example, even if the house only appreciated by 3% a year, my friend would’ve been paid about $500,000 to just live.

  42. This topic (buy vs rent plus stock invest) has been done to death on pf blogs.

    Essentially you are conflating buying a place to live, with investing. Which I dont think you should do.

    A more honest comparison would be investing in a rental vs investing in the public markets.

    The other tricky ommision is the leverage involved. On one hand, the entire gain from a positive outcome is included. (Capital gain from investing mortgage debt). The ‘opportunity cost’ of any stock appreciation meanwhile doesnt include any leverage. Why?

    Because if you had of included leverage into the stock market at the same eye watering levels as the home investment, the outcome would go against the narrative of this piece.

    And what about stamp duty?

  43. More than the numbers are psychological reasons that buyers come out ahead of renter. Buying a home with mortgage is a forced saving and investment. Most people who cannot save enough for a down payment and ended up renting probably will not be disciplined enough to invest in the stock market. Also as Sam pointed out its highly unlikely that most people would put all their money in the stock market at once but they would for down payment. As arm chair quarterback we would say that doesn’t make sense. Stick market it’s just as safe or safer long term. But again it’s psychological. The peace of mind of physically sitting on all your money.

    1. Darius Ogloza

      There is also what I like to call the owner’s “call option” – the right to tell the tenant to get the hell out and find somewhere else to live. Whether this is primarily a psychological phenomenon or a genuine economic right would be an interesting discussion. An owner/landlord can exercise this right against his/her renters subject solely to the terms of a contract (i.e. lease) the terms of which he/she agreed to in the first instance. When you own, there is no one who can exercise this call right against you (though one may argue the bank does if you took out a mortgage loan). Rent control is a lot about transferring this economic right away from the landlord and giving it to the tenant.

    2. Financial Freedom Countdown

      Sam, I’m with you on buying at the right time since I bought in 2013. It was not the low point but who can perfectly time the market. The SALT cap of $10K is painful though.

  44. There are definite risks and drawbacks of owning a home. There is a lot of time and expense needed to move, especially if it is in a hurry because you are changing jobs. We lived in our house for 30 years and got out of it almost exactly what we paid for it plus improvements. I’m not sure property taxes and routine maintenance were all that much less than rent, so definitely not free. It really depends on the market.

  45. In your SF example, where does the seller live after the sale? That’s kind of a big deal. He’s walking with a million, but if wants to stay in SF he’ll have to spend that money again.
    If not then you are talking geoarbitrage, which is a whole other topic.

  46. One thing to keep in mind is that a lot of counterfeit money has flooded RE markets from China due to its manipulation of the external RMB to the USD. And most of this is under the control of the CCP. 25 Trillion in US assets have been weaponized and can be dumped en masse to force the Fed to rescue markets & bring the USD down to the true value of the RMB.

    Just be cognizant that there ‘s been a huge artificial buyer out there insensitive to price. Just pull up a RMB/USD long term chart for evidence.

  47. Buying hasn’t worked out as well for me despite buying a Manhattan apt 8 years ago. A move across the country necessitates selling (renting out would not make sense given the high sublet fee that the building charges). I bought for 1.2, and after broker fees, I’ll net 1.45. The carrying cost was about $5500/month. Running all the numbers, I’d have about $80k more in my pocket now assuming I’d rented and invested the down payment instead (assuming a conservative 5% return). Just goes to show even in an area with relatively high appreciation and high rents, and holding for a relatively long amount of time, ownership isn’t a slam dunk. You still need to luck out a bit with timing/location. SF over the past decade is a very unique case.

    1. I’m surprised to hear this coming out of Manhattan. Do you mind highlighting the numbers in the format of this post? What type of property is it?

      You’ll make me happier that I didn’t buy an awesome 2/2 in Manhattan in 2001 with views of the Chrysler Building on 22nd and Madison for $799K!


      Monthly rent avoided for eight years:
      Total rent avoided after eight years:
      Net proceeds after fees, principal pay down, all taxes from selling house:


      Opportunity cost of not investing $260,000 (down payment) in the stock market from X – Y:
      Net mortgage interest cost after eight years =
      Net property taxes after eight years =
      Maintenance cost after eight years =

      Total cost / benefit =

  48. Renting is better than buying in expensive cities like New York and London. For example, the cap rates in Manhattan right now are dismally low: 3%.

    So you’re “better off” if you rent an apartment and invest the down payment you’d otherwise pay to buy a house in the stock market.

    However, I’ve never encountered a single renter who’s actually done this!

    Every renter I know is either 1) living paycheck-to-paycheck, or 2) has a trust fund / parents subsidizing their rent.

    What gives?

  49. Sam, I found the title to this article to be a little confusing. To me, the title “The Return On Rent Is Always – 100%” implies that paying your rent has a great return. But, when I read the article, I get the sense you are arguing that by NOT paying rent you come out ahead (by buying property). I’m just looking for clarity.

    We bought an old house on a 203(k) loan, spend a year renovating, and now live there. F*ck it was hard. We will see if it works out towards our financial independence and if all the money that went into the reno was worth it. (Compared to investing)

    We are in Philly. Bought for about $100 a sq ft. Put about $120 a sq ft into it. Only thing I dislike is having to sell to get the proceeds. You can sleep in your house, but you can’t eat it.

  50. I guess you didn’t read the rapper 50 cent deal. After buying a house 12 years ago, he finally sold it for -84% of the initial value invested. That’s paying big to live in Connecticut for 12 years.

    Imagine he had invested all that money on an S&P500 ETF like SPY. Even taking into consideration the financial crisis of 2008, he would have a profit of 154.70% (including dividends). 03-04-2007 -> 03-04-2019.

    That’s a 12.89%/year.

  51. So there’s a simple rule of thumb to figure this out… the rule of 300:

    Monthly Rent * 300 to get an estimated home price. If you can buy an equivalent home for less than that, you’re better buying, if you can’t you’re better off renting.

    This assumes that you are fulling investing the difference (Mortgage + Insurance + Maintenance, etc – Rent) and the 20% down payment.

    In your scenario, you’re better off buying. 5500 * 300 = $1.65M So, if the home cost was more than that, you would have been better off renting.

    Has to do with the ratio of market/real estate returns to the leverage on the mortgage.

    1. Mr. Wow – the purchase price has to account for mortgage rates and property taxes for this 300x rule to make sense.

      1.65M home at 3% int and SF’s nearly static 1.18% property tax has a very different cost of carrying than the same 1.65M in NJ or IL or TX where property tax might be 3% and moving up every year. And much worse if you recall the 8% rates typical back in 2000.

      Similarly, that rule about buying a house for 3x your income was based on the formerly normal reality of 20% down and 8% rates.

  52. I like ownership, but the property prices in our country have been flat to negative the last 5 years. That’s when leverage and high interest rates kill you (when property stops appreciating)…

  53. we bought a house for the right reason and that was for a place to live. it wasn’t for the investment even though it’s gone to 4x its value since 2000. the life enhancement of owning this big-ass stone house is hard to equate with a number. we wanted a dog so we got a damned dog. i wanted a big space for a painting studio so bought a house with a huge attic space. want to paint the rooms purple or put in a dungeon you can do that too (we didn’t do the last two). now we have owned the place outright for 4-5 years and we’ve definitely lived for free if we decided to sell now. we’re in buffalo.

  54. Great article!

    My folks used to rent in LA County for nearly 15 years. They were paying almost $3,000 a month for a 1,100 square foot, 2-bedroom, upper-scale apartment. I convinced them 2 years ago to take the leap and become homeowners. They ended up purchasing a nice 3-bed 2.5-bath single family home in the suburbs with 20% down. Their mortgage ended up being $2,900 all inclusive. Although this looks like they save on average about $100 per month in living costs, they do now have to pay for water, gas, and electricity which does offset the savings.

    With numbers like these it’s a no-brainer to buy property if you have even the smallest amount of capital to put towards a down payment for a single family home. This is especially easy when you have a dual income household. I believe renting is beneficial only if you work in a field where you are constantly moving around.

    Thanks for the great read!!

    -E J

  55. This is so silly. The math here is totally predicated on enormous real estate value booms (which has only happened in select areas) and staying put (not incurring large transaction costs). Plugging in the average appreciation (~2%) across the country gives you a much more realistic look at how things have and will likely play out for most people.

    Here’s my concrete example: My parents bought in NJ in 1996. They paid $875,000. The value of the house now is ~$1.7mm.

    How does the math work out for them? Horribly.

    $875k compounded in the S&P500 would be worth $6.028mm today. Paying an average 8k/mo in rent for 13 years (I feel like that’s a high estimate but I’ll be generous to the “buy” case) would have summed to $2.208mm.

    Meanwhile, as buyers, they’ve paid ~14k/yr in taxes, ~2k/yr in insurance, and probably put ~300k into maintenance and improvements over the years.

    Net gain from renting:
    6.028mm – 875k – 2.203mm = 2.945mm gain

    Net gain from buying:
    1.7mm – 875k – 300k – 322k – 46k = 157k gain

    By my math, buying vs investing in the stock market has cost them millions. If they were levered, that would improve things somewhat (average stock returns have been higher than average mortgage rates over that period), but they’d still be coming out behind.

    Buying as “free living” just doesn’t pass the smell test. Yeah, if you bought in SF before the boom you made out like a bandit. Whether you were smart or lucky, good work. The rent vs buy math looks absolutely awful in places like NYC right now. I very much expect renters to outperform on a go-forward basis based purely on the numbers, but sadly only a very accurately calibrated crystal ball will tell you for sure.

    1. Sounds good John. I like when people do the math. But are you sure $875K invested in 1996 would be worth $6.028M today even with all dividends reinvested? The S&P 500 back in 1996 was at about 660 vs. 2,877 today.

      I’m impressed that they paid for their house 100% in cash. What did they do for a living back then? I’m not sure they would have invested all 100% of the cash they used to buy the house into the stock market.

      Are you planning on renting for life? Curious what your situation is, especially since you grew up in a rich household.

      1. a) The returns I calculated seem right. I used two different calculators which pump out very similar numbers:

        b) As stated, you can make various assumptions about leverage and other investment opportunities (the 30Y bond yield was ~7% in 1996, so even a bond allocation did very very well). But buying comes out a big loser to the tune of millions any way you slice it.

        c) I’d be more than happy to rent for life if the numbers make sense. I could currently buy an apartment for cash, but choose not to because (a) I have a growing family and don’t know where my kids will go to school, so having flexibility is important and valuable to me and (b) the market is squishy (even as rates are low, employment is full, and the stock market is near all-time highs) and renting is much cheaper. I’m open to buying if I know where I want to live for 10yrs+ and the owning is a value proposition that makes sense. Right now Russian/Brazilian/Chinese buyers are propping up the market with uneconomic purchases. I’m happy to wait for them to be bid-out (or even turn seller). It’s worth noting that the tax regime is becoming increasingly hostile to property holders, so letting legislative flux play through isn’t bad either.

        1. Got it. I think we are always biased based on our current situation.

          I’ve highlighted a friend’s situation in this post and showed the numbers. I’ve been a renter before and am currently a homeowner and landlord and am trying to be objective here. Always happy to hear the negatives, landlord horror stories etc.

          Not sure if people realize once you buy a home, it doesn’t preclude you from investing in the stocks as well. Most do.

          I would love to know more about how growing up rich affected your attitude towards money, work ethic, etc. One of my biggest worries as a parent now is raising a spoiled son who doesn’t appreciate anything b/c everything is so comfortable for him now.

          Related: The Importance Of Being Consistently Uncomfortable For Personal And Financial Growth

          1. A truly objective approach would look at real estate across the country over longer periods. It would not choose a single case from a single friend and use that to proclaim that buying is “living for free”.

            Of course buying your primary residence doesn’t preclude you from buying stocks. It does tie up a bunch of capital in an asset that’s extremely costly to transact in. That may work out. It might not. It depends on the performance of you local real estate market, returns in alternative investments, as well as rent vs buy dynamics. Generic prescriptions and exultations that buying amounts to “living for free because look at this guy” isn’t good work.

            Anyone who proclaims renting is “throwing money away” is doing emotional analysis, not thoughtful analysis. Owning involves throwing all kinds of money away too; Taxes, maintenance, insurance, HOA fees, periodic “upgrades”, broker fees, legal fees, opportunity cost of capital etc. Deciding which makes sense depends on the math (some predictable, some not) as well as a raft of intangibles (how much you value flexibility, how much of a warm fuzzy feeling you get from owning, how many of the headaches of ownership you want to take on yourself, etc.)

            I don’t think I grew up particularity “rich” (acknowledging that term means very different things to different people); I worked summer jobs and went to (a good) public school. Admittedly, I never wanted for anything meaningful. My parents were frugal and hardworking. I’d also rate myself frugal and hardworking. I’m not sure how to allocate the nature vs nature components there.

            Incidentally, one of the reasons I enjoy reading you blog is that you’re frequently quite wrong. Sometimes it’s more fun to hash through ideas in an adversarial way than to just nod and shrug :)

            1. I agree. One just has to look at their financial situation and be happy or not.

              Can you share your rent versus buy numbers using the same format in this post as well as location in a response above since this thread has reached its threading end?

              The more people can share, the more perspectives we have.

              I would say your parents buying a $875K house in 1996 is considered rich. The median priced home TODAY is only ~$240K.

            2. Here’s a pretty decent comp in my neighborhood.

              Monthly cost of buying = $14,573 ($13,820+4% cost of capital on down payment)
              Monthly cost of renting = $7,500 (the $6,875 is w/ one month free)

              Note that these numbers don’t include fees associate with buying NY real estate including mortgage tax (~2%) and mansion tax (~1%). Nor do they include the costs of maintaining the interior of the apartment.

              I’ll need the price of this apartment to appreciate about $85k/yr to break even. Maybe more to compensate me for the inflexibility of buying, maybe a little less to adjust for possible rent increases.

              But prices aren’t going up. In fact they’ve been flat to down, and feeling heavy. This is when the economy is humming. Where do things go if we hit a honest-to-goodness recession?

              Maybe NYC real estate gets a second-wind and prices start to ramp again, but it definitely doesn’t feel that way. The risk of a sell-off in a recession in the next 2-4 years feels much more real. Some very rosey assumptions make the numbers work for buying, but to me, renting looks like a no-brainer right now. In 3 years I’ll have an extra 255k of cash in my pocket to come out guns blazing when property is legitimately for sale.

  56. I love being a property owner and wish my parents had taught me more about the buying process, mortgages and all that when I was in high school. I had to figure it all out on my own. Perhaps I would have been able to own property sooner if I had understood the process better and been more motivated to save more earlier on. In any case, I’m happy now!

  57. Daniel Cohen

    Hi Sam,

    Great Article! Just curious.. Does you net mortgage interest include the federal tax wirteoff deduction for mortgage interest (upto 1million) It didn’t seem to be apparent.

  58. If you own rental property as a landlord, why would you want to write this article? You play poker right? You know the old poker saying of don’t educate the fish. Renters are good for us, so let them keep believing renting is good. As a landlord, I would never argue with them.

    1. I believe Sam is an ethical landlord who also happens to be a great blogger that enlightens others. Sally, you would certainly want people to choose to rent your properties rather than doing out of no other options. Keeping others on the dark only makes society a dark place to live in.

      Thanks Sam for your integrity and enlightenment.

  59. Thanks for the interesting article Sam. I concur that buying over the LT is often universally the better option. However, I try to just think about what the most cost effective (after taxes) option is for similar properties in terms of buying/renting. We live in the NYC suburbs (some of the nicest in the country) and it is considerably cheaper to rent than buy. So the only way the math works is you have to bake in some upside. This is a funky area where the last decade has been lost in terms of appreciation. Homes have legit stayed totally flat for the last 10-15 years (lower WestChester County) and I can’t imagine there will be any appreciation going forward for a number of reasons. Most notably, folks will continue to move to tax friendlier and better cost of living states/areas, but these areas are home to some of the highest prop taxe rates in the country and the SALT cap is a HUGE deal. Unless I am missing something, it’s really hard to justify buying in a market where the out of pocket expense is higher to buy v rent and any demographically the trend is strongly against you in Terms of any upside. Likely get worse, bc these states have to raise taxes to make up for the quick exodus…bad cycle. What am I missing? I desperately want to buy (have the means) but think it’s a bad deal.

  60. You close with, ‘Just make sure the numbers make sense.”
    Yet in other posts (and even this one!) you have pointed out that the numbers currently don’t make sense for San Francisco.

    The example you describe obviously worked out well for the buyer, but the real-life example linked in my name did not.

    Also, for your chart, it looks like you did not include the effect of rent control (ie, Prop 13 for renters), which applies to a large fraction of SF housing.

    1. Got to be careful with SS. The guy totally missed the boat as he has been negative about the SF property market for 15+ years now. Very negative bias. It’s sad because he could’ve also built a very large and respected site as well if he was more balanced.

      Housing market definitely cooled in 2018. I was hoping for more cooling this year, but I have seen the opposite as the stock market rebounded and mortgage rates collapsed.

      What do your numbers look like if you do the same exercise in this post?

  61. Sam, I love reading your material but these San Francisco rent assumptions seem aggressive. While this is anecdotal, I moved to SF in 2011 and lived cheaply in a house in the sunset district paying $3600/month in rent split 4 ways with roommates. I know other parts of the city are more expensive but when you factor in rent control even that hypothetical chart seems off.

    1. You just have to run the numbers. Since 2011, how much have you spent on rent and how much would you have spent if you bought a place in 2011 and sold today.

      Also, do you plan to live in your current arrangement for the next 9 years etc?

  62. Living in a low cost of living area for 30 years – our home value has not appreciated very much. After adding up the improvements we’ve made, we may break even when we sell. But where we live houses are not investments, they are a roof over your head and a nice yard for the kids to play in. As far as I was concerned, after living in five rentals over eight years, there was nothing better than owning our own piece of property and home. So aside from your numbers chart, there is the psychological component of home ownership as well.

  63. Another example

    Monthly rent avoided for 17 years: $1,300
    Total rent avoided after 17 years: $265,000
    Net proceeds after fees, principal pay down, all taxes from selling house: $150,000

    Opportunity cost of not investing $150,000 (down payment) in the stock market from 2002 – 2019 = $363,000 (142% appreciation)
    Net mortgage interest cost after eight years = $45,000
    Net property taxes after 17 years = $65,000
    Maintenance cost after 17 years = $110,000

    Net cost of living = ($265,000 + $150,000) – ($363,000 – $45,000 – $65,000 – $110,000) = -$168,000

    I think my biggest takeaway with this example is that timing really matters and of course the location as well.

    1. Thanks for doing the numbers! That’s all we can really do.

      Where is your property and what percentage of your property is the down payment?

      Do you think he would’ve invested your entire down payment into the stock market for all those years?

      1. Southwest, OH. ~45% down payment. Could have invested into the stock market, but I do that as well and wanted my own home.

        1. The numbers would have worked out a lot better if you had leveraged more. 45% is a huge down payment invested in a slowly appreciating asset. That appreciation would have been turbo-charged with more leverage.

    2. I haven’t taken the time to work out the detailed numbers as you have Sarah (kudos!) but just from a property appreciation perspective I’m probably in a similar situation. I bought in 2010 in a suburb of Annapolis, MD for $635,000 and according to Zillow my house is worth $675,000 today. I realize Zillow might not be entirely accurate, but a 6% appreciation over 9 years, buying in 2010 after the crash, sucks big time.

      1. Hmmm… can that be right? Buying in 2010 is pretty good timing and being not too far away from D.C. has to be good. I’m really surprised if that was the only appreciation.

        1. I agree the Zillow record is probably a bit low because our house had been recently renovated in the last few years when we bought it whereas the comps were probably not as nice inside, but several other similar models in my neighborhood sold 2-3 years later for $640,000 (granted not as updated) but then the house next door (also same model) sold in 2017 for $475,000 as a bank REO. I think those numbers are pulling down the Zillow value, but hard to say by how much. Even if you add $40K to the value to accommodate for the fact my home was more updated, that’s still only about 13% appreciation over 9 years.

  64. I see what you mean, but you missed several key factors most people must consider.

    How long are you going to stay in one place?
    How high are the property taxes?
    How is the city/state doing fiscally (is it Chicago?)

    I understand your point in this article – it’s not a good idea to rent forever, but it makes a ton of sense for people who are trying to stay flexible with their careers.

      1. The first question I asked was – staying in Chicago for a minimum of 5 years, Y/N

        Then I assessed the financing and did a cost/benefit breakdown. Can I put 20% down (or however much to avoid PMI)? Can I afford the property tax and HOA (both sky high in Chicago)? Does this calculation make sense from a financial perspective?

        Then I assessed whether or not I want to buy physical property in a city/state that is teetering on total financial ruin.

        All of those factors combined, I came to a resounding no. However, if I knew for certain I would be spending the rest of my life in Chicago, I would probably buy to take advantage of the low interest rates.

        Thinking about my friends spread throughout the US, almost all of them in high COL areas (NYC, SF, Chi, LA) rent, and everyone in lower COL owns their home. Obviously not shocking results but interesting nonetheless.

        1. Chicago, IL is one of the worst places to own it seems due to sky high property taxes and a mismanaged budget. You guys are #1 or #2 for highest property taxes in the States. Add on 4 months of sub zero temperature, and it does seems like a tougher decision to buy.

          But prices seem so cheap too based on income and income potential there..

          1. I have a good friend who has been invested in Chicago real estate for the last 25 years. He has owned beautiful lake shore view condos and historical mansions (some divided into multi-family; one still single family) in the Gold Coast. He bought when the city center was just starting its revitalization.

            Although his timing and his sense of taste is impeccable, my rather unassuming working class apartments and upper middle class homes in CA have far outpaced his returns and over a shorter holding period. Chicago just hasn’t seen the sustained appreciation that CA has.

            He has been living in SoCal for the last few years and has been steadily divesting his Chicago holdings.

        2. See this is where I am at. I crunched the numbers and evaluated the risks.

          In our country, with city property rates, load shedding (electricity supply is switched off), mushrooming squatter camps (who steal electricity and water from neighbouring houses) and the risk of expropriation without compensation, I don’t think property is a safe/sound investment.

          And then on top of that you have to maintain? Uh-uh. I just spent Sunday cleaning the gutters off a double storey house. Was not fun. Plus I can see the concrete roof tiles are wearing and will need to be replaced in a couple of years time. I’ve learnt from friends the cost of a new roof is basically a third of the price of a house.

          And then there’s the continuous list of stuff that needs maintaining, geyser (had to be replaced due to load shedding), cracked/chipped floor tiles, shower head, lounge window, toilet (internal tap is leaking), light switches (switches that break, plus one started shorting and kept zapping us!) etc. It just goes on! And all of this is for a house that’s 25 years old!

          As a full time worker, I don’t want to fuss over these things. Maybe if I was retired I could be bothered to do all of that. I’d rather tell the landlord/lady and have them fix it and save myself the hassle.

    1. Maybe- maybe not – depends on individual circumstance.
      What is the career really worth. I have talked with lot’s of people and realize many people over inflate the value of their chosen career path.

      Granted $ is not everything but $ should always be considered in decision making. Living rent free by having a low or no mortgage is worth a lot of $ as this article points out. Maybe more that the “career”

  65. My wife and I own 6 properties in the Midwest. We live in 1 and rent the other 5 and the income from those 5 cover their own expenses plus the expenses of living in our primary residence. Along the way they all appreciate, we avoid paying rent, and we can look to invest more. This is a huge benefit to continuing to grow our net worth.

    Managing and maintaining property isn’t for everyone but we enjoy it. It’s a good spouse bonding experience to have a shared business. I’d always recommend going at least neutral and buying a primary residence and if you can, try your hand at investment properties.

  66. Great article Sam – just in time I was wondering whether I am doing fine with renting or not. I am currently 29 years old living in NYC with a year net income of 100,000 USD. Because of my job, I wont know where I would end up in the world and because of this I thought I would be better-off renting for the next 5 years. Instead, If I know that I am going to live in NYC forever, I would have definitely considered buying.

    Thanks for sharing your thoughts.

    1. If you don’t know where he will be living in the next five years then definitely rent. New York City is undergoing a softening in property prices and rents right now I believe. You tell me. There doesn’t seem to be a rush.

      Depending on your family situation though, you might find yourself in a rush eventually. So long as you’re doing good with the money you’re saving by not buying, I think you’re in a good spot.

      1. Recovering Engineer

        The $5M+ market in NYC and the surrounding metro area is getting soft with weaker economic conditions and the full impact of the tax reform hitting people. The market for $750k-$1.5M homes/apartments is still pretty hot because the supply is so limited. Similarly rent for a 1/2/3 bed apartment under $7,000/month I haven’t seen as much softening because that’s what everybody wants. Transaction costs are insane here, I think I was out ~$40k at closing when it was all said and done, so the break-even is a little longer than most places. I would agree though if you will be here 5-7 years and can afford the down payment, buying anything around $1M will be a net positive.

        1. It costs $40K for you to BUY a place in NYC? Can you split that figure out if you don’t mind?

          I totally see the $5M+ market as soft in NYC.. been that way for a couple years now. That should eventually hit the sub $2M market, as people in that range would simply buy up for better value.

          Sweet spot in SF is also under $2M. It’s just the way it is for two DINKS making $200 – $500K.

          1. Recovering Engineer

            I moved to Westchester, just outside the city. Our property taxes are so high it moves the sweet spot down but that’s what I still feel like the $1M range won’t see too much weakness because you have plenty of dual income with young kids who want the good public schools and to stop paying NYC income taxes. 3/4 bed houses in a good school district will always be desirable.

            On the closing costs, I forgot ~$7k was property tax reimbursement so $33k in various fees/transaction costs. Recording tax $9,500 + transfer tax $4,800 + mansion tax $12,000 + title insurance $6,200 + misc other fees $600 = $33,100

            1. Gotcha. But on those closing costs…. is that really what the buyer of the property assumes, or the seller?

              In SF, the seller pays the transfer and recording tax…. which is one reason why we don’t sell, including Prop 13 on the property tax amount.

  67. One of the more interesting trends they say is happening is that millenials are no longer buying homes but prefer renting these days. This may be due to these individuals feeling priced out in the major cities they congregate at.

    I am curious to see the potential impact it will have on homeowners. If people choose to rent, then obviously there will be less demand for home purchases which may exert a downward pressure on home prices in future.

    Although home appreciation is the most likely scenario for most areas, there are areas where if you were a homeowner you could be underwater due to declining housing prices (Detroit, etc). But odds are in your favor that over the long term you will do well.

    1. I have been through this twice. More people start renting so the price of rent increases, then it goes up so much people start buying and renters get a deal; 1/2 month off for signing a lease, more people start renting and the price of rent goes up. It took my 2 cycles to wise up but am glad I did as rents have tripled in the last 19 years since I bought.

      1. That’s a great point Rob. I didn’t think of it that way but it makes sense, when demand increases prices increase and at one point rents may rise to the level that buying becomes trendy again.

    2. I believe one of the reasons millennials have put off buying is because they want to buy something they can’t afford and, hence, feel priced out. Based on numerous discussions I’ve had with a bunch of millennials on the house hunt initially but then gave up to rent, they complain about not being able to get what they want. What they want is more than their budget. There are a lot of suitable homes for their budget but they don’t want those.

      1. I can agree with this! One thing that kept me from buying was not wanting something that needed major work. I could afford something that needed updating, but I don’t have the money to do all the updates right now. If I want something updated or new, I cannot afford it. You can find many gorgeous apartments for rent that give you everything you want and you get it all right now.

        I am getting to the point where I no longer want to rent because I’m tired of not having a yard for my dog and a place I can call my own, so I’m willing to sacrifice a beautiful kitchen and master bath. But I can relate to wanting to rent because you want nice things right now and literally cannot afford them.

        Really good point here!

        1. The thing is.. a lot of times in real estate you need to put in the sweat equity and sacrifice with aggressive savings and take the risk and buy. I can see these three things preventing people from investing more.

  68. Dave @ Accidental FIRE

    Oh the comments on this one are gonna be good, I’m making the popcorn now.

    I did exactly what you said and bought in 2001 in the DC metro region. I wasn’t making much at the time and it scared the bejeezus out of me because the housing market had already been going up like mad for years and I was worried it was a bubble. Here I am 18 years later and my house value has gone up 270%. I could rent it out now for almost 3x my monthly mortgage. It was a good move to say the least.

  69. My sister and BIL live in DC, and this is an excellent article to pass along to them! Sadly, what keeps them renting is a lack of $$, not the lack of a desire to own.

    1. Actually what keep them renting is lack of proper mindset, the $ is likely there.
      Awareness, goal setting and discipline WILL make the $ appear. IF they really wanted it.

      1. Eh, without personally knowing a couple’s position, it’s easy for you to make that assertion without evidence. Knowing them and the savers they are, I can confidently say it is a difficult situation. They will get there one day!

        1. Well, there are many areas in the DC metro area to live that are near metro and lower cost that gets you a starter home.

          It costs time and you don’t get to live in as trendy an area.

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