Comments on: Renting versus Buying a House – A Contrarian View

By: Chad Brand

Chad Brand — Sun, 22 Jul 2007 15:59:00 +0000

Glad this post was helpful, Erin. Most people simply assume that renting is “throwing money away” because they’ve heard that so often (even more during the real estate boom) but if you actually run the numbers, it is often not the case. It obviously depends on each individual situation (location of the country, price differentials, etc) because real estate is local, but in many cases, renting can pay off big time for those who don’t necessarily want/need a house.

By: Erin

Erin — Sun, 22 Jul 2007 00:38:00 +0000

Hello, thanks for the helpful discussion. My husband and I are thinking of buying in Silicon Valley where prices are astronomically high. Given the interest that is owed on a 30 year fixed rate mortgage on a (for the area) ‘cheap’ 700K townhome, the tax break isn’t enough to make it more profitable to buy over taking the difference in monthly payments (btwn buying and renting) and investing the money. Considering the millions of Americans who purchase their homes, I was worried that we were missing a key component to this thought process. Glad to read that our logic, and for that matter, our math, is correct! Renting seems to be the way to go in our case.

Although one could argue that property values in this area will continue to increase at a much higher rate than the rest of the nation…..and that speculation in this housing market is well worth it!

By: Chad Brand

Chad Brand — Wed, 09 May 2007 05:35:00 +0000

Given where interest rates are today, I would venture to say paying cash for a house isn’t a great idea, looking at it from a financial standpoint only. On the face of it, that investment (avoiding a 30-year fixed mortgage) is earning 6% per year, but it is actually less than that after you factor in mortgage interest deductions that you are missing out on. If you are a good investor, you would likely do better investing your cash elsewhere.

I would bet that most people who pay cash for a house do it either because they 1) are swimming in more money than they know what to do with, and/or 2) are extremely debt-averse. Both are adequate reasons if you aren’t focused on the ROI component.

By: Bobby Kolev

Bobby Kolev — Wed, 09 May 2007 05:23:00 +0000

That is an interesting and educational disscussion.

Investment-wise, which one is better: buying your house and paying at 100% or putting 20% down and playing the market with the rest 80% (presumably beating inflation by 7%)?

By: Chad Brand

Chad Brand — Mon, 07 May 2007 18:51:00 +0000

Andy,

In that case, you are implying that the entire $10,000 in appreciation is yours to keep. But you don't own 100% of the house, because you borrowed the money. After year one, you have less than 25% equity, with the bank owning the rest.

Let's say you sell the house after 1 year for 5% more than you paid (ignore the sales commission, even though that is a huge expense in this example). You bring in $210,000 but have to pay the bank the outstanding mortgage amount. After factoring in your down payment and one year's worth of monthly payments, have you really earned a 30% return on your money?