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%.

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.

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?

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.

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.

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 $810,000 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 50,000+ 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 FS original post.

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

  1. 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.

  2. 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.

  3. 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.


  4. 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.

  5. 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.

  6. 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

  7. 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.

  8. 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. 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

  9. 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. 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.

  10. 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.

  11. 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!

  12. 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?


  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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

  19. 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?

  20. 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.

  21. 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?

  22. 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.

  23. 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.

  24. 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.

  25. 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.

  26. 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.

  27. 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.

  28. 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.


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