If renting is “throwing away money”, so is property taxes
EDIT: Let me be clear, I don’t think renting is “throwing money away”. I’m addressing what I see as an incongruity: that the type of people who think this don’t feel the same away about property taxes, a reoccurring, unavoidable housing expense that doesn’t go towards building home equity and nominally goes towards improving the area around your house, maybe. That said,
I live in Houston. No state income taxes, so you can believe you’ll see that in the property taxes.
Current situation: I’m paying $940/month with two other roommates for a townhouse by downtown. It’s great, but lease is up July with no option to renew.
Every time my lease is up, it’s another chance to do my favorite thing: rent or buy cost benefit analysis.
Pro-rent:
1. My housing expenses will never be lower than they are now.
3. I love not having to worry about house shit and focus on the rest of my life, which is hard enough.
4. Single, and any house I’d buy would be too much house alone, unless I have roommates.
5. Uncertainty. By nature, I’m uncertain about everything, down to what I’ll be eating for dinner or doing for the weekend. Don't love the idea of 3-5 year commitment.
6. I don’t want to be a landlord and worry about my roommates fucking up my house.
7. I don’t want to change the dynamic (getting money involved) between my existing friends/roommates by becoming their landlord.
8. Upfront costs of furnishing appliances.
9. If I collect rental income, it won’t last forever. Single guys don’t stay single forever and people move one, I’ll move on.
10. Not convinced housing outperforms S&P in the long run: 5:1 leverage skews results.
Pro-buy:
1. Opportunity to generate rental income (at least for 12 months, maybe more) to offset increase in housing expenses.
2. I say that I want the optionality to relocate, but fairly happy with my current job, and inertia makes it unlikely to move.
3. Not pricing in what I’m getting for $940 (current monthly rent) per sqft vs whole house
4. If I divided total rent by three, only fair to divide full housing costs (mortgage, taxes, etc.) by three
5. Not pricing in home equity appreciation vs increasing rents over time
6. Property taxes (and other fees, HOA, etc.) passes through via rent. The landlord won’t operate at a loss.
Thoughts/experiences?
What is your age?
25
At that age there's too much uncertainty in your life. Definitely rent until you settle down in a specific area long term.
I disagree. I bought nyc real estate at 25 and it was the best decision of my life. Move to nyc and buy property.
How old are you now? I would vehemently disagree and I’ve made plenty of money on my apartment over 10-12 years.
The analysis is not clear cut and depends on various assumptions. Buying's main benefits are less hassle of moving (your landlord may kick you out etc.), better inventory particularly for best in class units (not many 5-6m units for rent), forced savings, a leverage line if you need ever at low cost, and especially later in life once you've paid it off, some insurance against reduced income (just property taxes and HOA, or you can sell). Whether it's a financially good decision is too uncertain -> rental yields, annual appreciation assumption, tax deductibility, opportunity cost of alternative investment all play into it
You forget that buying a property has immense tax advantages.
You can depreciate investment property against your income to pay less taxes now, essentially deferring your tax liability to when you sell it.
This lets you compound your wealth over time.
If you live in the property, even if you cannot depreciate the property to pay less taxes, you can still write off a portion of the interest on your mortgage, as well as the property taxes and get money back.
Either way, it is far better than renting. You are not paying the full property tax, because you can write off most of it up to a certain amount.
Once you are done living in that property, you can turn it into a rental investment property and get even more tax benefits.
All in all, the decision process depends on taxes, your interest rate, and other factors.
I've heard that property taxes are tax deductible, but only if you use itemized, not standard, deduction.
Obviously you wouldn't know my tax situation, but I'll say that I've never come close to itemized as a single filer. But you're saying that property taxes (might) be enough to change that?
Also to your point, there's also the TX Homestead Exemption for primary residences that maybe takes off 2% (?) from the purchase price.
Capped at 10k deduction due to trump
Capped at 750k and arguably baked into the rates due to higher demand. The analysis is quite complex and unclear
10k for property taxes, but I'm not sure how mortgage interest rate deductions work. Is it this:
For houses up to $750k in property value, you get straight line mortgage interest deduction if you itemize?
Example: 6% mortgage on a $450k house is $521,270 over 30-years or $17,375 a year.
So my 2023 itemized deduction would be $10,000 + $17,375 = 27,375
VS standard deduction of $13,850
So if this is true, I'd net $13,525 in reduced federal income tax? Seems like a slam dunk if true.
Yeah, residential real estate is a shitty investment 90% of the time vs. DCAing in the Sp500. Only makes sense to buy a single family home in growing markets/areas with sustainable MOATs.
Tell that to 80% of Canadians.
Property taxes mean you don't actually own anything and you are in fact renting from the government. If you decided for one day not to pay rent to the government on a property YOU "own" they will forcibly either garnish your wages or even take the so called property you own to pay their extortion. Repeal all property taxes. In fact repeal 80% of all taxes. None of it is going to anything productive anyway.
Wrong, large majorities of both parties support the social safety net. Even the republican voters do nowadays, that's why the rhetoric shifted from fiscal conservatism to the "culture wars".
Whoever's giving me ms: read and weep. The libertarian party gets 3% of the vote for a reason. Only 22% of Republicans support social security and medicare cuts.
https://www.dataforprogress.org/blog/2023/1/19/a-majority-of-republican…
the reason being that people in power don’t want to give up control of their wage slaves. nobody is gonna fund a party running on taking away control it just doesn’t make sense.
What a laughably shitty take. Are you 12?
yeah, property taxes, interest, HOA, repair & maintenance are all a waste of money, and they in total are larger than rent for most major cities.
You're in IB and you even noted that leverage skews results in the pro-rent column, but you're not going to include access to cheap leverage in the pro-buy column?
How many other ways does a normie (i.e. non UHNW) individual get access to potentially millions of dollars of low-interest lending? Sure, if you end up in PE and have the option to funnel excess cash into your carry allocation - I have no idea how common this even is - then that's one thing. But I'm in consulting so short of hitting full partner and getting the buy-in loaned to me, there's no other way I would be able to get $1MM++ lent to me at 3-4%.
Good point, but let me ask this: at 5-6% rates (with good income and an excellent credit score, no less), *is it* cheap leverage?
Just because a mortgage is the only game in town for a *normal* person to lever up, doesn't mean its automatically a good deal. The fact that it's a deal readily available (and culturally marketed) to so many people feeds into my skepticism that it is a good deal.
Where does the normal person get 6% YoY consistently? At what rate would this levered debt become a liability?
I'm not going to go through the math of it, but the idea that renting is "throwing away money" is an absurd myth that I wish was possible to debunk.
Start with the obvious; not everyone can afford to put down enough cash to buy a house. It's a big chunk of money! Plus a ton of related closing expenses which your mortgage doesn't cover.
Ownership is time and labor intensive, and is prone to sudden massive capital needs. If you live in a rental, and your roof leaks, you call your landlord and it gets fixed, and it doesn't cost you anything. If you own, you are the one bidding out that job, paying for it, making sure you're home to let the people in, vet their insurance, etc etc. Most people on this site (a) aren't in real estate and (b) aren't homeowners, and tend to discount this very obvious fact, probably because it's difficult to represent on a spreadsheet. But it should be one of the more meaningful concerns when buying a home: can I afford to maintain it?
Additionally, if you aren't sure you'll be in your home for more than, say, five years - buying is stupid! Even with a fixed rate mortgage, the first several years of paying it down builds effectively zero equity in your home. It's all interest at that point. It's only on the back end that your payments start building real equity. So effectively you're paying rent to the bank, instead of a landlord. Plus moving costs and closing costs and all that.
On top of all that, your homeownership scenario means being a landlord. Which is a job in and of itself - so yes, you can hypothetically monetize your home, but that menas you actually have to be a landlord! You're talking like you'll ask your tenants to pay you as if you're in a commune, but that isn't how it works. If they pay rent, you're responsible for ensuring they have a safe and habitable home. Moreover, probably erases some of the tax advantages, since I doubt you'd be legally able to claim it as a primary residence if you're also treating it as a rental property.
TL;DR - lots of good reasons to buy a home, and it's a great driver of wealth, but there are a lot of scenarios in which homeownership is not the financially responsible choice, and renting is preferable. Paying rent can be summarized as paying some amount to another person for the convenience of them handling any and all problems that crop up in your living situation. At the end of the day, you pay your landlord the running costs of your home, plus another 5-6% (usually).
Two overarching ways to look at it:
1. Could rent and have less of a headache but also make less money
2. Could buy, would potentially be more of a headache but could also be more lucrative.
I'd say where most of the crowd of "renting is throwing away money" probably don't understand things from the taxes/deprecation perspective, they just see that you don't own anything if you rent. True, if you rent you are basically paying an expense, where as, if you have a mortgage you will gain equity over time. However, as a homeowner you also have extra expenses, such as taxes and upkeep. It could potentially all work out the same if you pay rent but also save the extra amount you would pay on those extras; in America we are horrible at saving so that's where that theory goes out the window.
I know right now it seems that there are a lot of people getting rentals, and its hot on Tik Tok, but its also work. Sometimes what seems the smart thing or the best thing on paper doesn't fit your lifestyle. Meaning, owning a home may make slight more sense, but if you really hate having to deal with home repairs, or dealing with finding tenants, it might not be worth it to you.
I'd say they just don't understand anything at all. Generally speaking, if you hear someone make that statement, you can safely discount anything else they have ever or will ever say.
No, rent is a fee for using an asset someone else has to own and maintain. Property tax is just government theft extorting you over something you own and maintain.
That said, owning > renting all day long unless you need the flexibility to pick up and leave easily. I bought my first a couple of years ago and am trying to get a rental now. Owning real estate is probably the "easiest" way to build equity if you're in a stable job that you know will have meaningful, steady compensation increases over time.
Property tax is government asking you to pay them to protect your property and guarantee your ownership of it. It always boggles my mind that smart people can't make this connection. Property taxes pay for all sorts of things that boost the value of your home. Local fire departments. Police forces. Roads. Schools. These things don't spring out of thin air. A fire department exists for the sole purpose of making sure your (well, everyone's) home doesn't burn down!
The idea that "ownership" is some magical, inalienable right is so funny to me. What stops me from walking into your house, putting my shit down, and claiming it as my own? Absolutely nothing. You'll say, you and your firearm stop me, but what stops me from bringing one myself? The threat of government action, a government that has a theoretical monopoly on violence. Your property taxes pay to make sure that backstop to your ownership is there.
Look into tax benefits, depreciation, deductions, and cost segregation, which can significantly offset expenses if you buy a rental property. For that, I ended up digging into cost segregation studies, https://costsegregationguys.com/, which can help property owners maximize tax savings.
Both concepts are equally stupid. That's clickbait financial advice and doesn't reflect an actual thoughtful analysis of the value you get from renting/paying property taxes.
Your property taxes often fund schools, local services, etc... which means that your higher taxes are paying for "amenities" which boost the value of your home. I have never seen this kind of analysis done, but I'd bet a ton of money that a house in an area with no fire department is worth less than one where response times are really good. Similar to schools, for which exhaustive research has been done.
Also, you sort of gloss over it in your "pro-rent" analysis, but buying a home means needing to be prepared to make large capital outlays if things go wrong. If lightning hits a tree outside your house and a branch falls on your roof, you don't really have the choice of just ignoring it. You've got to hire someone to remove that fallen limb, you've got to repair your roof, and you have to do it immediately. When you rent, none of that work or money comes from you.
People who shit on renting from a financial point of view simply don't understand that being a landlord, or a homeowner, is a job.
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