Another point why it is bad is a bit of psychological.
If the borrower does not put a down payment he/she might not have a sense of commitment.

The best deals when funding/lending/sponsoring is involved is when all parties have something to lose and have a lot to gain. With down payment all parties are committed.

This is why most landlords focus on “duplexes”, apartments and other mass market housing units. No one spends $400k on a new home in Saskatoon just to rent it out :)

So yes, there are a few things going on here:

Cannon_Fodder catches one part: In many cases, a person will end up renting an abode that is not as nice than they would own..

Now there are some single-family homes that people do rent. It is possible to make reasonable comparisons with similar units. But then, as you say, how do landlords “make money” if it’s cheaper to rent?

Well the truth is, the landlords who are making money renting single-family homes likely didn’t buy those homes today. They likely bought them when the markets were more balanced. Right now, most places in Canada have very expensive homes.

Example: My Mom lives in a place that would go for around 300k. Let’s say I dropped 50k in savings and took up a mortgage on the house. My (30-year, 250k) mortgage payment would be $1,500 to $1,600 / month. But that house was purchased in 1990 on a sub-$1,000 mortgage. Do you see the disconnect here?

It’s unlikely that I could buy the house today and rent it for a profit, but it’s quite likely that my mother could. Why? Because housing prices have increased quite drastically, far more than inflation.

How much? The Bank of Canada has an inflation calculator: $100,000 in goods in 1990 would now cost $147,000. That house is now 18 years older and yet has somehow doubled in inflation-adjusted value?!?

You have to realize that housing has been on a 15-year run in terms of growth. Homes purchased in the 90’s could reasonably be rented by their owners even though new buyers would not be able to do so.

It looks like you’ve been riding that home ownership wave: I bought five years ago for $180,000 with 25% down and I just sold for $269,900 privately with no commision to a broker.

And you’re probably doing “OK” by it, but the house you bought with your new money is likely going to be worth less than your list price in 10 years. (or salaries are going to be way higher)

You could get further ahead by renting a piece of crap than by living in a nice place. I guess dreaming of piles of money in a brokerage account and living in a place that stinks is better for some than having enough to retire on and living in a place with closet doors that don’t fall off the rails every day.

Not everyone lives in Toronto. I was paying $800 a month for a two bedroom that stank and had closet doors that fell off the rails everyday. The maintenance guy would come by and “fix” the closet doors every once in a while. I now pay a little more at $829 a month mortgage + utilities + taxes for three bedrooms and three times the space. It doesn’t stink but I have had to adjust my closet doors a few times. I bought five years ago for $180,000 with 25% down and I just sold for $269,900 privately with no commision to a broker. I don’t know about everyone else but buying seems to have worked for me.

I just bought a new place. I will have real doors on my closets instead of those crappy sliding doors.

I think that if you compare equivalent homes you won’t be further ahead renting.

I could be wrong, but I think the point was that an individual could either buy a home and have a mortgage payment of $1,800 /month plus all of the other costs or rent at $1,000/month and invest the difference and actually come out ahead in terms of networth.

In many cases, a person will end up renting an abode that is not as nice (area, square footage, amenities) than they would own. That can help explain why there is such a large difference between the 2 scenarios. In a way it isn’t really comparing apples to apples, but it is reality. Personally when I was faced with the option to buy a condo in the Toronto area vs. renting an apartment, the cost difference was almost double, but that is because what I was willing to pay in rent was much less than if I was willing to ‘invest’ in home ownership.

That doesn’t add up. That would be a pretty stupid landlord.

I think Scott nails it.

And it’s also worth noting that not all landlords do very well. How many landlords have you ever met that can give you an hourly rate for their “lording duties”? Home values and the time spent on homes is measured in years and humans tend to be very bad about calculating that kind of stuff.

At best I’d suggest that most landlords are giving themselves a secondary stream of income at the cost of their own time. FrugalTrader here can supplement his day job with some extra rental income, but I’m sure he’ll tell you that he spends a bunch of time on it and he’s probably not making more than he does at his engineering day job.

What is meant is that if it costs you $1000/mo to rent (just for rent) and $1800/mo for a mortgage payment…PLUS mortgage insurance, house insurance, utilities, repairs, taxes, etc., it is cheaper to rent than to buy. Take the difference in cash and invest it. In 25-years you might come out farther ahead by renting and investing rather than owning.

There are calculators out there that will let you run scenarios.

Also, think in terms of $/sqft to give you a P/E ratio, like stocks have. How much would would you pay for a “house stock” with a P/E ratio of 50, 80, 100?

Thing is, people in North America especially, have this great desire to “own”. Look at all the generations of Europeans and New Yorkers who will rent for their entire lives and are completely comfortable with it. Just a different mentality. If owning your own home is important to you then buy a house and forget about it. If increasing your net worth and maximizing your returns is more important to you, then you may consider renting.

Now, on the other hand, with a family, it made more sense (and there was certainly an emotional component to it) to own a house. But it wasn’t because of the investment component of buying a house because, quite frankly, I don’t think of home ownership as a great investment. In the last 5 years our house value has increased at just over 5.15% CAGR. However, we have also sunk several thousand into it (patio, fencing, minor landscaping).

Now, think about what it would cost to sell this house. Unlike selling stocks, the cost to sell a home is extremely expensive – probably around 3-7% of the value of the home when factoring in real estate commission and lawyers’ fees. That is quite a ‘back end load’ fee! It doesn’t cost very much to leave a rental property.

I, too, was one of those unfortunate ones in the early 90’s where we had to sell our home 5 years after we purchased it and didn’t even recover our initial selling price. Coupled with the property taxes, increased utilities, legal fees, realtor commissions, etc. – it was a terrible investment.

But buying leaves you exposed to interest rate volatility. You may not remember the rate hikes of the early 1980’s, but mortgage renewals at 17% or higher caused many folks to return their keys to the bank, shattering their home ownership dreams. I feel that you are missing the downside potential in your discussions.

Look at the market in Canada. If you had bought a $250000 condo five years ago at say $140000 in yesterdays dollars, you would be paying about $750 in mortgage payments, permanently. To rent that same condo today, you would be paying almost $1250. You can’t just factor into your calculations what you save on todays date, you have to look at the future. The question would be what would you be able to do with that $500 now as opposed to the $100 you might have saved by renting per month over the last 5 years.

However, if you bought a $100,000 house in the mid-eighties in St.John’s, NL, it appreciated to about $140,000 in the following 17 years — a rate less than i2% per annum. The stock market over the same period had considerably greater returns. You havenot included Condo Fees as well. These would increase considerably over time.

Furthermore, This site talks a lot about the Smith Manouvre. If you had bought 5 years ago you would now have $90000 in equity to potentially invest. Calculate the compound interest on that and there is no way that renting would have superseded value when it comes to wealth building.

However, the Smith Manoeuvre does not contemplate using the increased equity in your home. It does not increase the loan amount beyond the initial mortgage amount. The tenant would be making investments into their portfolio in larger amounts from day one! They arguably could hold a margin or investment account supported by the difference in monthly accommodation costs.

As you state, we don’t know what future direction the markets will take, however, if past performance is any indication, in many markets in Canada, one could have done better by regular investments while renting, than by depending on the incremental increase in home values as the way to wealth. In my own case, I have seen a considerable increase in my family residence value, but unless I move to a low cost town, I have no real means to extract that wealth. I currently own a home in large part due to the lack of rental accommodations in the the town I live in, but the times I have rented have been far more beneficial to my financial health.

DAvid

And what if you had bought a 150k condo five years ago at say 200k? You’d still be paying the same mortgage even though your home value had dropped. You’d be at -50k in potential equity. Heck, even with a 20k down payment, you’d still owe more than the house is worth.

In fact, you’d be subject to one of the risks I discussed. If you lost your job and had to move at that point, you’d be forced to sell the house at a loss.

Some more useful links:
John Chow: The House You Live In Is Not An Asset
Get Rich Slowly: If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home. While both stocks and housing are cyclical markets, long-term historic trends show that housing appreciates at a rate barely above inflation, while stocks tend to return an inflation-adjusted 7-10%.

We’re also at the end of 15-20 year upswing in housing prices. More fun links: Priced out forever.

Nolan: You must own both [stocks and real estate] and over the long term your wealth will accumulate.

Really? According to who? Do we have names?

I have posited that home ownership is a very personal decision and that you can generate wealth either way. You’re stating quite the opposite.

I’ve made a blog post and two extensive replies. I’ve provided hyperlinks to multiple view points with extensive examples worked out and individual calculators provided. You’ve given me lines like this with no evidence to support the claim. No hyperlinks, no in-context quotes, no examples with supporting data. You have one shady example with a 5-year time window.

You’re basically providing zero value to this conversation.

Look at the market in Canada. If you had bought a $250000 condo five years ago at say $140000 in yesterdays dollars, you would be paying about $750 in mortgage payments, permanently. To rent that same condo today, you would be paying almost $1250. You can’t just factor into your calculations what you save on todays date, you have to look at the future. The question would be what would you be able to do with that $500 now as opposed to the $100 you might have saved by renting per month over the last 5 years.

Furthermore, This site talks a lot about the Smith Manouvre. If you had bought 5 years ago you would now have $90000 in equity to potentially invest. Calculate the compound interest on that and there is no way that renting would have superseded value when it comes to wealth building.

Now, the obvious objection to this post will be, nobody new the market was going to jump like that. Well, that was the point of my first post. No one knows what the market is going to do, so the best thing an individual can do is to get in the market, stay in the market, buy only what they can afford and be diversified. To put your money in solely stocks, or solely real estate is ignorant. You must own both and over the long term your wealth will accumulate.

For the average homeowner in the average market – I’m not sure if there is a right answer regarding renting vs buying. Renting an equivalent property generally only comes out ahead if the renter saves part or all the difference in monthly costs – how many average people do this? I’m sure there are some that do but obviously there are some that don’t. And for the people who wouldn’t save if renting – are they also borrowing from their home equity if applicable?

Bottom line (and the point of my post) is that a financially responsible person will do well whether they rent or buy – and of course, the opposite is also true.

The average monthly cost of home ownership is almost always more expensive than the average cost of a rental. So the big calculation here is finding the difference. If I rent and save the difference, how much money do I end up vs. owning a home? You might end up with a $200k home, but I might end up with $250k in the bank (or the other way around).

Try the NYT calculator below and you’ll start to get a feel for the numbers. One of the big problems you’ll find is that little differences start to add up. If your investment make 10% vs 9%, you could suddenly be ahead, if your repair costs are bigger or bigger at the wrong time, you could suddenly fall behind. You could also be trapped in a overpriced housing market (i.e.: Edmonton a year ago). Check out the current supply and demand curves. Housing prices shot up to 300k+ and now suddenly the demand is 6 times the supply. Locking in your house at 300k+ was definitely an expensive proposition, I know working professionals were taking (university degrees, full-time jobs, etc.) who would have needed a 40-year mortgage (at Edmonton salaries) just to pay for these places.

Your mileage will vary quite a bit, you’ll have to do the math for yourself. I encourage you to read the discussions below (both for and against) and use the calculators below. I think that you’ll start to see lots of ways that renting can put you ahead of the game.

Calculators:
Excellent one from the NYT, notice the number of sliders and options
Canada’s office of consumer affairs
Ginnie Mae

Discussions:
Myths that ruined the housing market
The Simple Dollar: here he “thinks it through for himself”. This article is like 5 pages long and he’s still waving his a lot. (in response to the first link in fact)
Kiplinger.com
http://www.rentlaw.com/rentbuy.htm
Four-Pillars
Get Rich Slowly
Recent Kiwiblog

The assumption that home ownership is an excellent investment is largely inaccurate. As Frugal Trader states, for the most part, residential property values parallel inflation, while other investments can outpace inflation. Also, the simple measure of comparing the purchase price of the home vs. it’s selling price does not take into account all the costs of ownership (including mortgage interest).

All is not as it first seems. You might wish to provide the information to support your thesis before challenging Gates VP.

DAvid

I would like to issue a challenge to Gates to show that a house purchased today will be worth less in 25 years than what you bought it for. In other words, show the data instead of just talking about it.

Frugal Trader – What are your thoughts on this?

Nolan and Jordan are both quoted, please feel free to post replies / rebuttals here or there (I’ll read both :)