someone had to buy the house you rent

March 13th, 2008

Someone Had To Buy The House You Rent

There has been a lot of buzz on the blogosphere about renting vs buying when it comes to houses. Since I live in a part of the country where the costs of buying a house and the costs of renting, at least on the surface, are not that far off (and houses to rent are pretty limited in availability, I am comparing apartments for rent to houses to buy here) I find the idea fascinating that in some areas of the country, it is significantly cheaper to rent a house than to buy its equivalent. It is not that I doubt the truth in this, many bloggers have done the math and shown it to be true, I just don’t understand how it can be true. And I also find it interesting that housing may be the last frontier where there is any instance where it’s better to rent. No one thinks renting appliances are a good idea, and very few financially-oriented people advocate renting (leasing) a car. But a house, that might be better to rent than to buy.

Why don’t I understand how it can be better to rent than to buy? Because someone has to own that house you’re renting. If you’re paying so far below what a mortgage on that same house would be, aren’t those owners losing money on the deal month after month? I understand how renting an apartment can be a good deal – there are tons of apartments in a complex and so the cost for the building as a whole gets offset by all the many rents that get paid to them. But a house? And by house I mean a single family detached house. I just don’t get the math. Do big rental companies buy up scores of houses and then offset the ones they lose money on versus the ones they make money on? Do individuals not rent out houses any more? I know that isn’t true – I read blogs all about individual people renting properties for profit.

I understand that in some cases, the owners already own the house outright. I understand that there are tax advantages to being a landlord. I just don’t understand how those factors can account for such a huge disparity between renting and buying, from the perspective of the person or people who own the house you’re renting. I can’t wrap my head around the math end, and I’ve tried. Even if the owners own the house outright, they had to pay for it in the first place, and there are carrying costs like property taxes and insurance to contend with. They need to make back the money they’ve invested in the property, correct? Have all owners who rent out their houses fall into the category of “I’ve owned this house forever and already made all my money back on it”? That seems unrealistic to me, but maybe that’s the answer.

This is not to say that I am asking about this because I’m worried about the owner’s welfare, they made the choice to buy the house. Just like I’m not really all that concerned with the people who choose to buy new cars so they can take the depreciation hit for me when I buy their used car two years later. I’m just completely befuddled about how this can work out from a mathematical standpoint, and I’ve tried to do some research on it, but haven’t really found any answers.

So I ask my readers – how does this work? Anyone know how renting can be so much less expensive than buying, yet the home’s actual owners don’t lose piles of money? In the case of renting an appliance or renting (leasing) a car, the numbers always work out for the actual owners in the end… do they here? If they do – why are you renting?

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55 Responses to “Someone Had To Buy The House You Rent”

  1. Here in Seattle, where a total crap house only NEAR the city runs about $450k, the rents are pretty high, but still cheaper than buying in some cases. What I find the most often is that the house is paid for and no one would be willing to pay a rent equal to the mortgage (if they could, they would just buy a home!).

    What I’ve found overwhelmingly is that this is mostly true in areas like the University District (by the UW) where the majority of people living there are in college and post-college. They simply couldn’t pay the full rent price because of their position in life, and because of the traffic associated with the college, no one really wants to live next to the college unless they are going there. But the college is ON THE WATER. The house values by the UW are unbelievable.

    This is a very long ramble (written before bed, at 2:45AM no less) to say that I think in many ridiculously priced areas, the landlords are just trying to rent it for SOMETHING, rather than take a complete loss. And for the renter? A $1200/month rent is far easier than a $3k/month mortgage, when the average house value is upwards of a million dollars. That’s the situation near the UW, and in other select parts of Downtown Seattle which have their own convenience and trouble, and provide these interesting pockets of rent-cheaper-than-mortgage areas.

  2. Our scenario: our landlady and her late husband bought this house many, many years ago (at least 30 years ago). She probably couldn’t buy the house again right now, but it’s already paid for. Her only expense is the property tax on it. I don’t think she makes a lot of money off our rent, but it helps her cash flow in her retirement. I think she is holding on to it so that she can leave it to her children when she passes.

  3. I’m a renter In Sydney, Australia. To give you perspective. I pay around $1390 a month for my rent, but the mortgage on my apartment would be just under twice that, as a apartment in my block just sold for $370,000 AUS. Even with a 20% deposit I’d be looking at a 300K mortgage.

    The unit is nice, but nothing special. I simply can’t afford that kind of repayment as a single person, and I make good money.

  4. You’re thinking about this wrong:

    – You’re thinking month to month. The owner doesn’t have to cover the fully mortgage, property taxes, insurance every month in order to make money.

    If they are able to recover mortgage interest, property taxes, insurance and just a portion of the mortgage then when its all said and done they will be ahead. They are building equity.

    So when you think they are losing money, well, the answer is no – they small portion that they are putting in each month to help cover the mortgage is all equity. They will get it back either once the house is paid off or they decide to sell it.

    You’re think too short term by going month to month.

    I find it unbelievable that anyone would pay as much to rent when they could own. Sure in some situations it might make sense but on the whole they would just own.

  5. I don’t doubt that in expensive places it is cheaper to rent than to buy – why it is has always confused me.

    @Investing911 – Okay, that makes some sense to me, I see what you’re saying. It is a long term scenario that at the end they’ll own the house the renters helped pay for.

  6. I wrote about benefits of renting yesterday. My husband and I are simply not ready to buy a house right now, so renting is the best option for us for sure.

    I think home rentals are either too crappy to be worth much as a house for sale (and the owner is taking what she can get) or they’re in a market where many people can’t afford to buy houses.

  7. Where I live, many people can’t afford to sell their homes for what they owe own them (they’re underwater). Since they can’t sell, they try to rent out the home to recoup some of their losses. Even though rent is less than their mortgage, at least they’re slowing the bleeding.

    That said, one of my friends was evicted two months ago because their landlord was pocketing the rent money and not paying their mortgage. My friend learned this when the sheriff showed up at his doorstep one morning to let him know he had to pack his things and leave.

    If you’re going to rent in today’s market, it really helps to check on your potential landlord to make sure they won’t foreclose on the house while you’re renting it. It’s getting scary out there.

  8. I own an apartment (actually in New Zealand) and live overseas (Japan), so I have the apartment rented out. Since I bought the apartment mortgage interest rates in NZ have gone up significantly to the point where I now have to add about $50 of my own money to the rent I receive each month in order to pay the mortgage. Add in the quarterly building maintenance fees, local taxes and insurance and I’m making quite a loss on it… looked at in one way.

    On the other hand, the way I see it is exactly as investing911 described- the apartment is gradually going up in value, and the mortgage is slowly being paid off, mostly by someone else. Maybe the people who live in my apartment are saving money over buying an apartment now, but in 15 years or so I will own that apartment outright, whereas the renters may well still be paying rent to someone- it’s most definitely a long term thing for me.

  9. I think that you need to think long term in a different way. Unlike a toaster (I sure hope no one has rented a toaster), a house is an appreciating asset. So, while the cost may lead to a $1000 a month mortgage, property tax escrow, and homeowners now, when the owner bought it 20 years ago, it may have been cheap enough to only have to pay $500 for these things. Therefore, while it would cost a new owner $1000 to account for the profit the seller would get selling in the current market, the old owner can get by renting it for $800 a month in a break-even situtation (I have never rented a home, but I would assume that it would be nice to sock away at least $3500 a year towards repairs unless you have adequate money elsewhere to cover it.)

    Other reasons I could see for renting below the price of a mortgage are: owns the home outright and just wants to make a little income, rents too cheaply out of ignorance of current home rent and purchase values, and needs to make the price cheaper than a mortgage to attract renters.

    Also, like Investing911 said, some people may rent below what they are paying on their mortgage in a tough market because they are still making an investment.

    As to why people rent, I would say that it is because they know they might move in less than 5 years, they don’t want to be responsible for fixing problems in the house, or they can afford more house for the same payment.

  10. @ Kacie – I do understand being a content renter. We were content renters for a long time while we were still figuring out where we wanted to settle down, etc. I know there are lots of reasons to rent around life-circumstance and around your financial circumstance. I totally get that.

    What I don’t get (and I am starting to a little with the comments, thanks!) is situations where people rent instead of buy simply because it is a lot cheaper in that market to rent instead of buy – why does anyone buy? Someone has to own that house, so why did they buy it? And if it actually works out better for the owner in the end, why rent?

    I am not one who thinks all people should own property. We decided to based on our own market etc and our life place now, but I’m not saying people should emulate our decision either. I’m just trying to figure out the economics behind the idea that renting is better than buying, yet someone owns that house that is being rented, so why would they own it too?

    @Brandon – I like the depreciating asset discussion. You know, I bet you could rent a toaster, I think you can rent anything :)

    Thanks for all the input, my brain is working on this now. I’m very financially ignorant and I want to understand, hence asking the question :)

  11. My take on the renting being cheaper than buying isn’t just the rent vs. house payment. There’s a lot more to it than the house payment. A lot of the landlords have bought the houses dirt cheap at auctions or pre-foreclosure from the actual homeowner. They’ve fixed them up cheap, and I am pretty sure there aren’t any homes in my area where the landlords aren’t making money on the deal. If they weren’t making money, there wouldn’t be so many rentals.

    But when it comes to ME as a renter vs. ME as a homeowner, I can think of a lot of reasons it’s cheaper to rent:

    * Property taxes vs. NO Property taxes
    * Homeowners insurance vs. renter’s insurnace
    * Maintenance on owning a home vs. being able to call a landlord to fix something.

    I think that’s where it ends up being cheaper to rent than buy.

  12. Millionaire Mommy is cooking her figures to get the answer she wants. She is assuming that her stocks will appreciate by 10% and her home by only 4%. I don’t know how accurate these figures are historically, as an average, but whether they can be projected indefinitely into the future is debatable. Real estate is an asset of increasing scarcity. We are reaching the limits of urban sprawl, and with higher gas prices, it’s a reasonable expectation that people are going to want to live close to where they work, as opposed to distant suburbs. That means that high value locations should continue to be a good investment. In contrast, the stock market depends on a growing economy, and although in the long term it has done well, we have to keep in mind that other countries such as Japan and Argentina have experienced major economic collapse in recent years and the same thing could happen here. The value of your stock investment could drop literally to zero, whereas your real estate investment is never going to be without value, because ultimately people need a place to live. It’s important to remember, too, that your retirement depends on being able to continue to pay rent. If the stock market experiences a correction at the time that you want to retire, then you are out of luck. Your income will be lower, and you might not be able to keep paying that rent. Owning a home decreases your overall living expenses, which means you need less money for your lifestyle.

    If I use the very same rent vs. buy calculator she does, and use the same figures, except assume equal ROI for both the real estate investment and the stock investments (7%), then the calculator tells me that I break even after only 1.6 years. So the assumptions you make are all the difference.

    MMND is also demonstrating a bit of hubris in assuming that she can beat the stock market. I think Peter Lynch may be the only investor to be able to boast such a record long term. Real estate is a decent investment, especially as part of a portfolio that also includes stock market investment (small, mid, large cap), bonds, etc. In other words, diversify! Nobody should have ALL of their money in the stock market. It’s too risky. So the idea that you have lost “opportunity costs” when you tie up your money in home equity is bogus.

    It is not a general rule that you can rent for less than the mortgage payment would be. That varies regionally. Most landlords would like to cover their mortgage payment with rent. It doesn’t always happen, but that’s the goal. Another thing to consider, though, is that rental properties are rarely as highly leveraged as primary residence. Typically the bank will not give you a loan for more than 70% of the value of the rental property (and interest rates are higher). You can make a lot of deductions on a rental property–not just mortgage interest and taxes, but also depreciation on the home. That means that very often you are not paying taxes on the rents you receive. That helps a lot. A lot of people have made fortunes in real estate, whereas I don’t know ANY rich people who rent their homes. It’s got to make you think.

  13. We rent because it’s much cheaper than to buy right now, though that’s changing rapidly. We pay $670 a month to rent half of a 3 bedroom duplex, which is way cheap for our area. The average starter home is upwards of $250,000, and our landlord actually put one of the duplexes he owned up for sale a couple of years ago for $390,000. Insane.

    Our landlord has owned his properties forever. I’m sure he paid less than $100,000 for them way back when.

    We also live in an area where housing prices shot up way beyond what a person with the average income in the area can afford. And I think that’s why a lot of people here rent. When all costs of owning a home are combined (mortgage, insurance, property taxes, maintenance), people just can’t afford to buy. Even if they’re paying close to what a mortgage costs, they don’t have to worry about property taxes or maintenance, and that can be a lot of money.

  14. Puzzlement over rent being less than mortgage payment:
    Rents are set by the market–what the market will bear. It has nothing to do with the landlord’s monthly mortgage payment, or paid off status, or what your mortgage payment would be if you bought the house today at today’s prices and interest rates.

    The landlord’s price paid for the unit was when they bought it, and the interest rate from original or re- financing. It may be paid off. It may be a ridiculously affordable payment even if it didn’t start out that way years ago.

    OP, you’re assuming the landlord is paying a mortgage payment at today’s housing prices and interest rates. Odd assumption!

    Some of us are happy permarenters for many reasons, I am. A house would be a wasteful suck on my resources and time, far more than what I need, and incredibly inefficient and potentially risky. I manage risk by renting, and free up resources for investing instead, and a diversified equity portfolio outperforms housing appreciation every time.

    Being a landlord with negative cash flow is really risky unless you have huge piles of cash handy to cover the risk. It can take up to 12 months to evict a tenant in some states; can you make the mortgage payment all that time with no rent coming in? If the tenant is slothful, negligent, or hostile in the way they neglect the place or even trash it, can you afford the repairs and redecorating and maintenance to get it marketable again?

    There’s lots of people who buy late-night TV audio programs or guru books that tell them property is great, debt is leveraging OPM, go out and just do it, and then they get in trouble because they have negative cash flow or even positive cash flow each month but no resources to cover maintenance when the HVAC craps out. Or they have to move and end up as a long distance landlord by default, and that doesn’t work very well and they can’t supervise the place and get taken advantage of. Or they’re just too nice to be a landlord.

    Even owning your own home isn’t a blessing unless you’re consumer debt free and have an emergency fund of 3-6 months saved up, and you put 20% down on a conventional FRM and the payment isn’t more than 25-35% of your take home pay. You can end up house poor. Or if you still are maxed out with debt and get too much house with a subprime ARM because someone kept nagging you that rent was throwing money down a rathole…hello, current subprime mortgage crisis?!?!?!?!

    The math nerds often overlook the complex math that takes into account RISK, but that also resides in the heart and the gut and the still small voice.

  15. LOL @ Catherine

    If my diversified global stock portfolio goes to zero, well, it’s Armageddon and Jesus is back and I don’t care about stocks and real estate anyway.

    Real estate can be a part of your portfolio without homeownership or rental property ownership; you don’t want to be too high in real estate because it will lower your returns.

    All the deductions landlords get are recaptured at selling time in capital gains. It isn’t a strong argument. The deductions don’t save you taxes dollar for dollar, it’s very inefficient.

    You talk as if you went to a real estate seminar and drank the koolaid.

    Volatility isn’t the same as risk, and time zeros out volatility. Inflation is the ignored risk, and RE normally appreciates at the rate of inflation only, bubbles excluded, so after expenses and taxes, you’re getting your lunch eaten by inflation anyway. That’s what makes equities so powerful; net of expenses, taxes, and inflation, you’re actually beating inflation, with 4x-5x the returns of other investments.

    Anyone who says their home was their best investment obviously didn’t do any other investing!

  16. Wow, lots of great responses! I am pondering things out some more. I might have to write another post with all the great experiences/perspectives given :)

    I am a math nerd but I am not a “financial” math nerd, for lack of experience/understanding. That’s why I ask and try to learn. :) I don’t doubt that there is a benefit for both the renter and for the owner, I’m trying to figure out how they can both get benefit at the same time. This is helping :)

    I don’t think of my home as an investment (hmm, I wrote about that too I think lol) but I do, for me, see benefit in owning vs renting. For me, in where we are.

    And I liked painting the walls. lol (not that you can’t do that renting necessarily, I just never lived in a rental I could paint :) )

  17. We rent a house for $1500 south of Miami. I know our landlord is taking a hit (but he is a retired doctor living in the Keys, so I think he is ordoing okay!), but it’s the difference between lowering your rental price and letting the house sit empty and get nothing.

  18. A guy moved in to our neighborhood and purchased seven houses here. He put his two daughters into two of them and moved himself and his wife into a third. He then proceeded to turn the other four houses into rentals.

    Needless to say, this didn’t do property values in our two-block by three-block neighborhood any good. However, it did the Rental Emperor lots of good. Here’s how:

    1. He bought the houses very cheaply. He would drive around and watch the neighborhood, identifying homes occupied by elderly original owners (the tract was built in the early 1970s). He then would approach them and offer a ridiculously low price. Often he was rejected, but occasionally he would encounter a single person who was impaired enough by age to not recognize how much her (invariably they were widowed women!) house was worth, and he would buy her out for $50,000 to $80,000 less than than the market value.

    2. He would tell mortgagers that he was moving into the house, thereby obtaining favorable rates.

    3. He would do all his own fix-up, often cursory and out of code.

    4. He would then immediately move renters in, charging the slightly less than the going rate for such houses.

    He told me that he did not earn as much as the rent, but that was not the point. The point was to put as little of his own money as possible into the properties while they built equity. He could afford to spend a few dollars of his own to keep the houses–he had a fulltime job as a janitor at the airport, and his wife had a clerical job at the local school. And equity they did build! Even before the bubble, houses in this neighborhood were increasing in value at about 10% a year. His plan, he said, was to build equity, and then when he reached retirement age, to sell them and move back to Romania, where $100,000 would allow him to live like a king.

    At the height of the bubble, he sold the four rentals and pocketed a ton of money. Each house had almost doubled in price, despite the damage he had done to the values in general throughout the small neighborhood (elsewhere in this area houses tripled or quadrupled in sales value). He then moved a block outside the neighborhood, into the upscale (no renters!) section of our area. And then he bought a $750,000 house in the fancier area at a distressed rate, held it for a few months, and turned it over for a profit.

    As far as I know, he’s out of the rental business right now. He saw the bubble coming and unloaded the properties at the right time.

    The point is not how much you’re making on the rental. You can’t rent a house around here for what a mortgage costs, because houses simply cost too much. If a person could afford a mortgage, she or he wouldn’t be renting.

    The point is how much the house’s equity appreciates. People like the Rental Emperor don’t usually “flip” houses, a highly speculative proposition. They understand that you don’t make money in real estate overnight; they plan on five- to twenty-year holds. Over time real estate appreciates in value at approximately the same rate as the stock market.

  19. @paidtwice – A few months ago I asked my landlord if I could paint. Not only did he say yes, he’s going to buy the paint! And now he keeps asking when I’m going to get around to it. LOL

    I know most landlords won’t let a tenant paint, but I think the fact that we’ve lived here for almost 6 years and have been stellar tenants helps a lot. We can pretty much do what we want.

  20. I think that generally people don’t buy a single family home at the going market price with a yard to rent out. They buy distressed properties and fix them up, get them at foreclosures, etc. The other group are former owner-occupiers who decide to rent the place after they move.

    A big part of the renting vs. owning issue is transaction costs. For me to move to a new rental my costs are just deposit and moving expenses. A new house requires mortgage paperwork costs, closing fees, and worst of all realtor comissions. Your old mortgage might have an early pay-off fee.

    All those costs might eat up two or more years of ‘normal’ housing appreciation (4ish percent). For some renting a place out might be preferred to enduring those costs.

  21. Kentucky Liz: I think it’s plain foolish to think that nothing short of Armageddon will make a significant dent in your “diversified global stock portfolio.”

    Whether the stock market will do better than real estate long term in the future is purely a matter of opinion, but you don’t have to “drink the koolaid” to want the security of owning the roof over your head for your retirement and old age.

    (As a matter of fact, I have made a goodly amount of money from real estate in the past. Enough that I hire a professional to manage it for me nowadays. )

  22. I haven’t been a renter since college, so I cannot really comment on that side of the coin. I will however tell you about being a landlord.

    We still own our first “starter” home. We outgrew that house awful fast (4 kids has a way of doing that to you) and wanted something with more room, more property, etc. We bought both our houses before the huge “boom” and the prices we paid were very low for our area.

    We decided to hold onto that first starter home for a few reasons.
    1. I am a girly girl and very sentimental about that house.
    2. I would love to someday move back into that house if we could afford to buy the lot next door and add on to the house and
    3. we know we cannot sell it in this current market, even if we wanted to.

    We found renters that are great people with a small family and the house is perfect for their needs. We charge them just enough to pay the mortgage and association fees. We also have given them the ability to decorate how they want;they can paint or change the drapes, etc. All we ask is that the house is maintained properly and the yard is kept nice. We have had no problems with them at all.

    The reason this family decided to rent is because they do not have the credit to get a mortgage in our area. In another(crappier) area they could, but they want to live in this particular area(good schools, parks, etc.) By renting they are able to live in the area they want for their family and can work towards possibly saving to buy in the area.The usual mortgage during the boom in our area was around 300k for a similar house, now it is more like 225K, we owe 100K. So, the mortgage is really low and very affordable to our tenants.

    Yes, essentially they are paying off the mortgage for us and that is pretty nice, we will eventually own that house without actually paying it down ourselves, but I think we both benefit from this. They are able to work on their credit/savings/debt and we are able to hold onto a house that I am reluctant to part with.

    Great post!

    Take Care


  23. We rent because we can’t afford to buy. Simply put, in 1997, when I first moved to brooklyn, brownstones in our neighborhood were in the low to mid 100s – $125k was the average. I remember when a house on a “good block” – ie few apartment buildings, mostly brownstones, well-kept, and a good central location – came on the market. In our neighborhood brownstones come in a few flavors:
    – the gut-rehab – houses that are in such poor shape the only thing to do is gut the building, leave the shell, and build from scratch
    – the move in but needs work – self explanatory
    – the “new” or newly renovated – also self explantory

    This brownstone was in the move in but needs work category. They asked for $175k. EVERYONE was talking about it. The figure was considered obscene in 1997. Everyone said, no way anyone is going to buy a house for that price – even a brand new house.

    Today brownstones on that same block go for $400 (average) for a gut-rehab, and $750 and up for newly renovated.

    I pay $1200/month for the top floor of a brownstone and that’s below market rent. My mortgage on even a small three bedroom *condo* or co-op would be easily twice that. Never mind, taxes, insurance, co-op fees, etc.

    The only people in my circle of friends who can afford to buy are people who bought HUD houses, gutted them and renovated. AND they had help from their parents.

    Do you know how much I kick myself that I didn’t buy that brownstone in 1997?

  24. On reflection, I realize my comment above, to the effect that rentals in a neighborhood of single-family houses push overall property values down, might offend renters.

    It’s not the RENTERS themselves that cause this phenomenon. It’s the landlords.

    Maintaining a rental house is the landlord’s responsibility. But many don’t, especially if they live somewhere far from their rental property. We were fortunate that the Rental Emperor lived in the neighborhood, where he could keep an eye on his properties, shore them up, and be accessible to neighbors’ concerns. Renters, as some commenters have noted, often are not even allowed to paint. And a renter has no motivation to maintain a property, because it doesn’t belong to her or him. Some landlords try to require renters to do things like maintain the yard and pay for minor repairs, but that is in general a ridiculous proposition.

    Older homes, such as the 1970s-vintage houses in my neighborhood, require constant maintenance to keep them from crumbling away. There’s always some repair, maintenance chore, or upgrade that needs to be done. Renters aren’t going to do those things, nor should they have to. Landlords, meanwhile, have as their goal to put as little money into the house as possible, and so they aren’t especially motivated to keep the cash flowing into repairs and upgrades, either.

    As a result, in many cases rental houses tend to run down.

    Also, when a landlord does not live near the rental, neighbors have no recourse when a renter is an SOB. A distant landlord doesn’t care about a renter’s obnoxious habits, as long as the rent is paid on time. The house across the street from me, for example, is owned by a college professor in Poughkeepsie, NY — I’m in Arizona. The current renter is a Hell’s Angel: covered with scary tattoos, he roars around on an unmuffled Harley and runs a shade-tree junker repair operation out of the garage. The police do not enforce the noise ordinance — last night the racket from his chopper lifted me off my chair at 11:00 p.m. — and because he’s smart enough to restrict his business hours to weekends and late evenings, the city slum abatement bureaucrats have never caught him in the act and so can’t enforce that ordinance, either. The landlord, from a distance of a thousand miles or so, doesn’t have to put up with him, so he doesn’t give a da**.

    When you have a Realtor representing you as a buyer’s agent, part of the service is to check for the percentage of rentals in a neighborhood where you are considering a purchase. Good Realtors will advise against buying a home in a neighborhood with rentals. Smart buyers can find these figures out for themselves, using the public records. This pushes values down in direct proportion to the number of rentals in the area — even if the rentals are well maintained.

    The unrepaired wear and tear on the houses and the irresponsibility of the landlords — not the renters themselves — is what drives down property values in neighborhoods that have a lot of rentals.

  25. Since my apartment would sell for over $1.2 million and I can rent it for $2000 a month, I think it is a deal!

    In Los Angeles, renting makes way more sense than buying either A. overpriced places in nice neighborhoods or B. affordable places in the crappy areas.



  27. It’s because most of the landlords bought when property prices were cheaper. And that’s almost always going to be the case, since investment churn is a sure fire way to lose money. Most homeowners of all types bought when prices were cheaper.

  28. In our area (Washington, DC Metro) the price of admission to the home owner’s club is $500K for a townhouse. You can’t actually rent a detached house here for less than $3000 a month, so we live in a high rise apartment building, all beautiful 815 sq ft. of it. Rental property here is usually in the form of buildings not houses (in my experience). Those who do rent usually bought before the rapid increase (pre 2003) in housing prices and are riding the wave up. Because the housing increase came after 10 years of stagnate prices, it isn’t dropping as much as I would like it to.

  29. kentuckyliz nailed it when s/he pointed out that the OP incorrectly assumed the landlord’s mortgage was at today’s housing prices and interest rates.

    I live in Seattle, where even small, unappealing houses on the edges of the city go for $400k at the minimum. I can rent a nicer home in a better location for less than HALF of what I would pay in mortgage/property taxes to own. However, I looked on Zillow and my current landlord bought the big old Victorian house I live in 15 years ago (back when the bubble had just started) and his mortgage payment is probably less than I pay every month in rent. In a different market, in a different city, it would make sense to either buy or become a landlord – but I expect that new owners attempting to rent out their properties are probably losing money.

  30. “kentuckyliz nailed it when s/he pointed out that the OP incorrectly assumed the landlord’s mortgage was at today’s housing prices and interest rates.”

    No, the economics logically have to make sense with current prices and mortgage rates. Otherwise, there would be no market in rental property, no one would ever buy it, and in particular, no bank would write a note for it. I’m working on a post for Wise Bread that explains the mechanics of this. Thanks for the impetus, Paid Twice! Your question will be answered in full!

  31. It is not always the cost you would pay in rent vs mortgage. You take on a lot of risk to buy a home and that is to be considered. If you are not in a position to maintain a home due to your work travel, or you are physically unable, or a single mom, it may be better to rent and not take on that responsibility. We owned a home in Florida and in one year our taxes went from $1400 a year to $3200 a year and our insurance went from $2300 to $4075 a year. That is a big jump that a lot of people would have been unable to pay. These are all the risks of owning that you need to be able to handle.

  32. My bf and I also rent In the northern VA area. We rent in fairlington which have multi level condos. We pay $1500 in rent; A unit in worse condition than ours sold recently for $360K, that doesn’t include the aprox. $200 a month in condo fees on top of everything else. Our $1500 is a steal for a 1400 2 bedroom that isn’t metro accessible. Right now it makes much more sense for us to rent with the space we have than to buy.

  33. Our current apartment is in a three-flat that’s been in the landlord’s family for three generations. I’d guess there are a lot of “long-term” landlords.

  34. It depends on the cost of the house to the owner. I live in Seattle, and 10 years ago, prices were significantly lower. So, while my target price for a condo would run me about $1200-1300/month in mortgage and dues, someone who bought 10 years ago maybe has to pay $500. Also, while that $1200-1300 would get me a reasonable one bedroom condo, I could rent a reasonable one bedroom apartment from around $850. I currently live in a house with a couple other people, one of whom is the owner of the house, and my rent is quite low. The owner bought the house 20ish years ago, and it’s value has gone up exponentially — as in, the amount that would be needed to make a mere 10% downpayment, based on the house’s current value, is more than twice what he originally paid for it.

  35. On reflection, I realize my comment above, to the effect that rentals in a neighborhood of single-family houses push overall property values down, might offend renters.

    It’s not the RENTERS themselves that cause this phenomenon. It’s the landlords.

    Yes. Yes, yes, YES.

    I live in one of the poorer neighborhoods in Columbus, Ohio. From the nearest corner on my section of this street to the building I live in, there are five buildings, including mine. My building (as in I live here, not as in I own it) is a four-unit apartment building, one of the houses is a duplex, and one of the other houses started as a single-family but is zoned as a four-unit building now. (No idea how they managed it. I wouldn’t want to live in an apartment in that building.) Out of those five buildings, two are inhabited. *Two.*

    The house on the corner, the one that was turned into a four-unit at some point, has been empty since 1995. The duplex on the other side of my neighbor (the other inhabited house) has been empty since before I moved in here in 2004. The new owners tried to rent it out shortly after buying it in… 2005?… not sure, but the rent they asked for was well above what the market would bear here. (It was on the For Rent sign.) On top of that, my neighbor tells me the foundation of the duplex is no longer sound. Obviously the place has not been rented yet. And now the neighborhood thugs and junkies use it for a hangout. I saw a beer can on top of the mantel in one of the units through the front living room window yesterday when my little girl and I were out walking.

    Across the street from us is a house that’s also been empty as long as I’ve been here. It is owned by an outfit in New York or Jersey, don’t remember which–a corporation that’s been implicated in some kind of real estate scam here that involved several OSU students. Next to it is another four-unit building which constantly has vacancies. Next to that are two other houses and I am not sure whether or not they’re inhabited. *I* would not live in them.

    My landlords were very flexible with me in letting me live here given my unusual circumstances, and they replaced the roof of the building in 2005, but overall their maintenance of this building has been very poor and they often go out of town on vacation. In the past week I finally got a letter from them telling me the emergency maintenance number in case something broke and I couldn’t reach them. Remember that I’ve been here since *2004.*

    The floors in the kitchen and the bathroom need replacing. The carpet needed replacing when I moved in. I don’t know when the last time was that the walls were painted but it sure wasn’t between me and the previous tenant. The windows are original to the building, which went up in the seventies. The seals around the panes are shrinking. I’ve had one window broken by neighborhood kids in the past year and it was replaced with plexiglass. The neighbor downstairs is suspected by the neighbor and possibly by my landlord of drug dealing and prostitution but no move has been made to evict him. I suppose I can’t blame the landlord, since there have been three tenants downstairs since I moved in here. The first one was evicted from nonpayment of rent, the second one stayed with her boyfriend more than here, and now this one’s a real winner too.

    It’s a drag, to say the least.

    The Ohio State student paper published an article in 2005 about this neighborhood and they blamed the fact that so many people rent for the neighborhood being bad. Nothing about it being the landlords, though. The prevailing wisdom about poor neighborhoods is that because we don’t own our homes, we have no incentive to take care of them. Apparently, not having the money for maintenance never crosses anyone’s minds over at that bastion of higher education, nor the fact that many landlords don’t allow tenants to take on maintenance or rehab jobs on their own dime. You don’t stop caring because you’re renting it, you stop caring because it’s crumbling and you can’t do anything about it.

    Sorry for the extremely long vent. I understand it’s no picnic to be a landlord either, I just don’t get why people make life harder than they have to. I’d buy a house in a hot minute if I could afford it, but I’ve done home ownership too, and you really can’t afford to do that if you don’t have significant savings going in–and I don’t mean for the down payment either!

  36. Oh, I meant to add that one of the uninhabited houses on my side of the street belongs to my neighbor. She would have it rented out, but her previous tenant broke in and ruined the pipes, which my neighbor had *just* had re-done. My neighbor is lucky to make the mortgage on both houses, much less can she afford to do two whole-house plumbing jobs in one year. Obviously, she can’t rent it out the way it is.

    I’m thinking semi-seriously about offering to get it fixed for her sometime in the next year if she hasn’t got it done by then, in return for a reduction in rent. She wants $500 a month for the place and I just can’t swing that right now.

    However, I’m safer in my apartment in terms of break-ins than I would be in that house, which is the one thing holding me back from offering. I don’t need all my stuff stolen nor my daugher and I killed in our beds in the middle of the night.

    And the cops don’t care. They’ve more than got their hands full over at OSU, I guess, and they only come around here and act on reports when they get a whole slew of them at once. I’m hoping this changes when their new police station opens nearby but I’m not holding my breath.

    Putting homeowners in on this stretch of the avenue might change things for the better. Homeowners have more clout than renters. I can’t even get a nuisance vehicle removed from the back parking area when they block the way for us to get in, even if I know for a fact they are not a tenant here and they’re visiting the building across the alley. Grr.

  37. 1. Rent control. Legally, rents can only go up by a certain percentage in whatever time period, though I forget what it is. There are ways to get around it though – evict tenants, “renovate”, get new ones at a higher rent. Fortunately I don’t think it happens too often, and when it does people tend to go crying to the newspaper and get some human interest story.

    2. Rents have not increased at anywhere NEAR the same rate as house prices, and this makes for a situation where people who have owned houses for a while bought them for much less than they’re worth and can rent them out for less. There are enough of them that newer buyers can’t charge higher rents than the older buyers, they’d never find a tenant. For example, my landlady bought the house about 15 years ago I think, it was worth about $300k. Now it’s probably well over a million. Her monthly take from the three suites is less than $3000, though that is lower than average.

    3. With the rate that house prices have increased they are just out of reach for most people here. A small condo (SMALL, like a 500 square foot studio) would be about $300k. Detached houses start at $6-700. Basically to buy a house in this town you need to be making well into six figures. Nobody can do it, so they rent, and they don’t tolerate increases quite as well as buyers.

    4. I have no idea why someone would be so foolish as to buy a house in this environment.

  38. I would buy a house if I could afford it because (a) I would like to benefit from any upgrades I would do to it instead of paying money to improve my landlord’s property, and (b) I would prefer my monthly rent payments to be going toward something I own rather than something the landlord owns.

    I could easily make monthly mortgage payments on a small house in my area, but there is no way I could come up with the money necessary for a 20% downpayment. A typical small house in my region is approx. $200,000 to $300,000. It will take me years to save up 20% of that!

  39. One thing I haven’t seen anyone mention here PT, is that often renters can afford the mortgage payment, but they can’t qualify for the mortgage because of bad credit. Since I charge a rent that is slightly more than the mortgage, I expect applicants to rent my house to have bad credit. If they had good credit, they’d be buying for what I charge.

  40. In many cases, it’s cheaper to rent because the owners are unable to sell the property and are drowning in mortgage payments, and don’t wish to walk away from the property. Renting a house for less than the mortgage payment is far better than no money coming in at all.

  41. Rob in Madrid Says:

    March 20th, 2008 at 5:52 pm

    One thing to keep in mind if you rent, it’s best to rent from private landlords than from corporations. Private landlords tend not to raise the rent, or raise it not as quick. I had a student whose parents had rented a very well situated apartment to a cleaning lady who couldn’t afford much rent, so they never raised it. Fast forward 25 years and when they wanted to pass it on to the youngest daughter she refused to move. 4 years latter there still fighting it out in court. If she wins they will have to write the apartment off as she will never move and her son can then move in. She pays 250 euros a month in an area where rents are 4 times that.

    Main negative to renting is if the landlord sells the place after two years, which we did when we decided we weren’t returning to Canada.

  42. Here in mid-Michigan, it is cheaper to buy than to rent. Even when you take repairs and upkeep into consideration. It took me years to figure out why so many people on the web were claiming that buying was a bad deal. I pay less per month, and have more house and yard.

    Of course, even in a depressed area, there are neighborhoods that got caught up in the bubble. And in very poor areas, there are such preditory lending practices that keep buying from being affordable.

  43. I think rents and mortgages generally track each other pretty tightly, with mortgage payments being greater than rents most of the time (but over time, mortgage payments “cost less” due to inflation). We’re still in a housing bubble, where speculative house buying has lofted prices a lot higher than they should be.

    During the crash phase, we should see rents rise a bit, and mortgages drop, until the rents are more expensive than mortgages. Then, people will start buying houses in earnest again.

    Also, FYI, a house is not an appreciating asset. It’s an asset that requires maintenance, and it depreciates. If the property and city surrounding the house are doing well, and/or population is increasing, then the house price will increase.

  44. A few points I didn’t see others make:

    (1) I live in California. I recently rented from a friend’s father and know that he charged less rent that he could have so that he could be super picky about tenants. Lower rent (but not too low) will attract more applicants, and thus the landord can be more selective. If this means the rent charge barely covers the mortgage, or is slightly short, selecting a reliable tenant that will pay the rent on time and not cause damage to the property is another part of the equation for “risk” and pays out in the long-term.

    (2) The current property I rent has a monthly rent that is much less than the mortgage. The owners purchased the home recently (1-2 years ago) but suddenly needed to move for a job change. They charge a low rent because they wanted reliable tenants who knew they were getting a good value and would stick around for awhile. Additionally, they needed to find tenants quickly.

    PS-I am also a perma-renter in that I can live in much nicer properties and pay about 1/2 the price I would if I bought. I have superior credit and a nice savings but I don’t want to throw all my assets into a house. I’ll reconsider the renting vs. buying equation when I (a) know I will be living somewhere for a long time (b) finish school.

  45. Scenarios that have given me rental properties:

    First, Own an old, run down, but fixer upper. Low mortgage payment, low property taxes. Met and married a wonderful person. Moved into his home. Did not have the time / inclination to finish fix up of “old” house to sell it. Rental income covers the mortgage payment only. Pay taxes and insurance – but they are offset by the depreciation deduction. Net gain at the end of the year + market appreciation (after bubble burst, value still 2x purchase price). I’ll keep it.

    Second, Own a nice home in a nice neighborhood. Personally did a great deal of improvements, upgrades, and repairs to the home. Appreciate’s 2.5x the purchase price (bubble). Market Crash (burst), value down to 1.5x the original purchase price. (did not refinance or overextend during the bubble) Have to move for work!! Love the house / love the neighborhood. Do not want to sell, maybe retire back there? So, keep the house but market’s rent does not cover the mortgage. The depreciation, the business loss, the other expenses offset my annual tax bill. Monthly, the pocketbook takes a hit. End of the year tax refund based on these expenses – replenish it. The very small, net loss is worth it to me for the location, the house, the equity.

    Very good CPA helps (and is worth every penny). She keeps me honest with a breakdown of the money “in v. out” on each house.

  46. Even though you may think buying is better, you have to really look at the larger picture.
    My mother bought her home in the mid 1950′s paying $23,000. After her death recently, it was appraised at about $239,000 (needs some repairs). If you figure in all the cost to owning a home, the average homeowner makes only between 5% and 7% after selling their home.
    If you rent, and take that money you would save on repairs, utilities, etc. and throw it to other investments, even in the recent market, there are some stocks that give 10% to 12% dividend yield. This is what I mean by bigger picture.
    So as I see it, rent vs. own, it will all depend on where you want to be when you retire and how smart you are when it comes to investing.

  47. joyce seolwane Says:

    June 30th, 2010 at 2:20 pm

    i am a single living with 9family my mother died 8years ago she was homeless,i amm the one who is responseble for everything,food, clothes,school.i also have to pay rent.i am earning about R4000 after rent is R2200. a month exncluding the owner is selling the house price of R630.000.00 that i dont qualify.may u please help me.hoping that my request will meet your favourable consideration and also wishing to hear your respond in advance,its very hard.

  48. joyce seolwane Says:

    June 30th, 2010 at 2:26 pm

    i am a single living with 9family my mother died 8years ago she was homeless,i am the one who is responseble for everything,food, clothes,school.i also have to pay rent.i am earning about R4000 after rent is R2200. a month exncluding the owner is selling the house price of R630.000.00 that i dont qualify.may u please help me.hoping that my request will meet your favourable consideration and also wishing to hear your respond in advance,its very hard.


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