Here's part of Bill's email:
"Maybe this is common knowledge but I've been trying to figure it out. I see many happy renters, talking about the benefits of renting vs. owning at the moment. I feel similarly and I'm keeping my eyes open for the market shift which is likely more than a year out. Still, that last post about the place on [632 NE] Russell got me thinking."
Before I dive into my favorite part, the financial analysis, I want to start off by highlighting a number of misconceptions about buying and renting.
1. Renting is throwing your money away.
There are only three things you really need, right? Food, clothing and shelter. A house is fundamentally just shelter at the end of the day, but we've made it out to be much more than that. You can rent and let someone else deal with maintenance, taxes, etc. Or you can buy and manage all these things yourself.
Renting is not throwing money away, it's paying someone else for the benefit of shelter.
2. Owning is always financially superior to renting.
This assumes that real estate values are continuing to increase. This is certainly not true when the market is flat or declining, due to the increased expenses of owning. And is also not true for short periods of time due to high transaction costs. We'll cover this in extended detail in the next post.
Also, Robert Shiller has shown that real estate has basically kept pace with inflation over the long term, so while real estate on average has been a good (or bad) investment over short periods of time, over the long term you'll likely just keep up with inflation.
3. Everybody should own their own house
Frankly some people just don't have the financial maturity, common sense or ability to maintain a house. It's been said before, but most of the people that are currently facing foreclosure in areas like California would have been better off continuing to rent. Then there are the people who treated their houses like ATM's and have in effect already sold the house, and blown the money on "improvements" (granite countertops!) or vacations.
4. You'll save money on your taxes by having a mortgage.
This is what my wife likes to refer to as Spaving (Spending to save). Every online calculator I've ever seen over-estimates your tax benefit, mostly by ignoring the standard deduction that everybody already receives. Never mind that you're paying a bank $3 to save $1 on average, I hear this argument all the time.
5. You can't make a rental "your own".
Sure you can. Most people don't, but you can paint, plant a garden, pretty much everything short of major construction. In Germany we had to buy and install our own kitchen (and remove it later), which really allows for customization.
6. A rental will never feel like home.
This is one of my favorites. Every place I've lived has felt like home, but mostly because of other intangibles, not always the place itself. I never thought our little apartment in Germany would feel like home, but after our first trip back to the States it really did.
Next time I'll go into the qualitative benefits of renting or buying, and follow it up with the quantitative analysis. If I missed any misconceptions please let me know.
