I was more-or-less with him up until the "Don't Rent" advice.
By his own admission, purchasing a condo and riding it up to the very top of the largest real estate bubble in history netted him only a 1% return. Any other market at any other time would likely have netted him a loss on that purchase.
In a non-bubble market, I wonder how much more he would have gained by renting that very same condo and investing the difference instead?
Agree, I would much rather rent my apartment if I could, but the way the market looks here it's not an option.
Renting is just like insurance, you pay a premium so that others take the greater financial risk: You're not tied down, you can move anytime, and you don't have to care about the housing market or interest rates. For some people this is worth it, for some it's not. Your mileage may wary.
The only other problem I have with his text is that he seems to suffer from analysis paralysis by not buying a computer for years since they drop off in value so fast. There's also a value in having a computer, or whatever other item, in that time.
Yes, if you wait one year you'll get a faster computer than what you can buy now, but you'll also be stuck with your current computer for one more year. How much does that cost? Sometimes you just have to suck it up.
Agreed. Better advice would be "stay behind the curve." Right now, if you want a Wii, it's expensive. If you're happy playing Playstation 2, it's cheap. A Wii will be cheap 5 years from now when something cooler is out. Same kind of thing applies to computers.
I use this method of saving on home electronics. Home electronics depreciate at a stunning rate, and by buying "behind the curve" you can find great deals on things you wanted a year ago.
This is why I still enjoy, and buy games for, my (refurbished) PlayStation 2 (actually, I still play games on my SNES too). My workstation was dated, so I built a new machine with parts just below top-of-the-line (Core2Quad rather than i7, 600 GB instead of 1.5 TB hard drives, for example).
The advice in the article about new cars is valid; new cars depreciate as soon as you drive them off the lot, because then they're "used." You might get a nice warranty package with it, but you can get extended warranties for used cars from certain dealerships.
I did the same thing around 6 months ago, except I refined it into 2-phases.
I got a Core2Duo E7500 and overclocked it well with a CM Hyper212+ heatsink+fan, for my worskstation.
Spent the money saved on high quality Power supply, case and motherboard.
The next upgrade is a top-of-the-line Core2Quad when local distributors slash prices on those to dump their old stock.
I'm aware there is a trade-off in Electricity consumption
Edit: technical typo
I got a SNES for my birthday last year from my wife. It is awesome!
More seriously I have a PS2 and a printout of the top 25 games for the PS2. Whenever I think of a new game system I can just look at that list, buy any one of those games for extremely cheap and have a ton of fun. (The good SNES games on ebay are a more expensive, but still $10-$20, Chrono Trigger was a bit more...)
Rent versus buy is a function of how long you plan to stay in the property. If you know you're going to live in San Francisco for the rest of your life, buy as soon as you can and rent out any rooms needed to make it possible. If you plan to follow opportunity where it leads, you'll never want to buy.
Even if he suffered a loss (i.e. if the appreciation in the home value was not enough to offset his accumulated outflow of principal and interest) it probably would not be as much as he would have lost by renting.
Your scenario assumes that (1) he could rent the same or an equivalent property for much less of cash outflow than buying and (2) he could have invested the difference in some other asset that had a much higher return than appreciation of the condo.
If the amount the rental amount is about the same amount as the mortage payments then you are almost certainly going to be worse off renting than buying under average market conditions.
> Your scenario assumes that (1) he could rent the same or an equivalent property for much less of cash outflow than buying
Of course he could. If your rent is paying your landlord's mortgage, you're overpaying.
> and (2) he could have invested the difference in some other asset that had a much higher return than appreciation of the condo.
Finding an asset with a better than 1% return is not difficult.
> If the amount the rental amount is about the same amount as the mortage payments then you are almost certainly going to be worse off renting than buying under average market conditions.
If you're wasting your money by paying your landlord's mortgage, you're going to be worse off than if you refuse to waste money and pay a reasonable rent. Renting is cheaper than home ownership; if it's not, you're doing it wrong.
I'm renting and probably paying the landlord's mortgage. But I know that I will live here a specific period of time and then move. So by renting, I'm buying peace of mind: I don't have to sell a house or worry about getting stuck with it, and I don't have to add a mortgage to my other debt.
When I'm going to be somewhere long-term, or at least have a flexible schedule for moving away, I'll want to buy.
On the "If your rent is paying your landlord's mortgage, you're overpaying" point: sadly, not every market is equal.
Over here (Uruguay), rents are way more expensive than an equivalent mortgage... simply put, people (myself included) don't have capital for the down payment (and the mortgage process is expensive in itself, at least U$D 1000 which is not a small sum here), so they don't have an option - it's renting, or the street/slums.
The only caveat is if you are somewhere long enough, rents will continue to increase while your fixed rate mortgage will remain constant (taxes and upkeep, of course, may not). I've looked at the costs of short term renting vs. buying in my market, and for the kind of properties I look at, it's significantly more expensive to buy in, say, the 2 year time frame.
This is probably generally true, provided that you reside in the property long enough to recoup the rather high transaction costs. I did the math on purchasing recently and given how long I expect to be in my current area, the math doesn't add up, even assuming relatively low upkeep costs.
I'm not sure how long you have to stay somewhere to hit the break even point.
From a new-buyers perspective (i.e. my own) this is actually good advice.
Right now an average sized house is about as much to rent as it is to buy with a mortgage (at least here in the UK anyway). There is no sane way anyone should be renting a whole house.
If, on top of your mortgage interest, you add in property taxes, property maintenance (2-5% annually?), brokerage fees and the gains foregone in purchasing property rather than bonds, is it still good advice?
> You add in property taxes, property maintenance (2-5% annually?), brokerage fees and the gains foregone in purchasing property rather than bonds, is it still good advice?
I should have mentioned; my calculations included most of those extras. To be honest, though, the only important thing is what you are paying out in total each month.
By his own admission, purchasing a condo and riding it up to the very top of the largest real estate bubble in history netted him only a 1% return. Any other market at any other time would likely have netted him a loss on that purchase.
In a non-bubble market, I wonder how much more he would have gained by renting that very same condo and investing the difference instead?