Comparing Apples and Oranges

If you’ve been around the PF block a time or two, you’ve inevitably ran in to an article about Buying vs. Renting. It’s like a right of passage as a personal finance blogger. Today, however, I don’t so much want to compare renting to buying as they both have obvious pros and cons. Instead, I’m simply going to share with you the one and only reason I absolutely, positively, can not bring myself to buy a home.

Our rent is $975/month.

I rest my case. Haha, but seriously. We pay less than $1,000/month for a small one bedroom apartment above our landlords main house. We have ocean views, stainless steel appliances, and crushed marble trim. We live in a nice neighborhood (not an apartment or condo complex), and although space is tight, it’s totally doable for the two of us.

Our rent takes up about 11% of our gross pay. Keeping our housing expenses proportionally low has afforded us the ability to put more of our take home pay in to savings. We’ve made some pretty incredible strides over the not-quite-two-years we’ve been married and I don’t want that progress to stop.

Buying a house would do just that. According to Zillow, a $975 mortgage payment would buy us a $137,000 pad. Seeing that I’m not interested in buying a condo (I hate the idea of HOA’s and Assessments that I have no control over), $137k wont go far in the way of real estate where we want to live.

To be honest, we’d have to be at minimum in the $300,000 price range to start finding 3 bedroom houses in neighborhoods we liked (Yes we could find cheaper houses in other neighborhoods, but remember, if we are going to buy something we want to be happy there. A house is a home first, an investment second.). Zillow tells me a $300,000 mortgage, at 4% interest, with zero down (had to calculate zero down to be fair since renting does not require us to give up any of our liquidity), would end up costing about $2,025/month.

And that is the exact reason we say “Heck no!” to home ownership. For us, it’s an apples and oranges comparison. We are totally fine renting a one bedroom apartment (apple), but if we were buying for the long-haul we’d only be interested in 3+ bedroom houses (orange). Is it fair to make that comparison? Of course not, but that is our reality and it is the comparison we must make.

Renting keeps our costs low and keeps our income more liquid. Before we consider buying anything, our actual rent costs and our predicted mortgage costs needs to be virtually the same. If buying is going to leave us significantly less liquid than renting, I have no desire to drink the kool-aid.

34 thoughts on “Comparing Apples and Oranges

  1. Don’t forget to consider the other costs of home ownership that you don’t have with renting (at least not in addition to your rent): increased property insurance (renter’s is much cheaper than homeowner’s), real estate taxes, maintenance, and repairs. So your monthly cost for owning a home is actually a good bit more than the $2,025/month figure. I’d estimate you could be looking at an additional $300 to $700/month more – maybe on the lower end if Zillow includes the taxes and insurance.

    Of course, you have to back out the value of the equity you’re building and the very minimal growth in the value of real estate (news flash: it generally keeps up with inflation only). But those only tend to matter if you actually use the equity for something. If you continually trade up or maintain the same level of housing, well, it’s not going to do a whole lot of good for your bottom line.

  2. I’ll admit to doing the same thing. We have no desire to buy an apartment or townhouse – I plan to buy a three bedroom house for life type thing, so renting vs buying for me is also a loaded comparison. You could argue that getting flatmates in to help pay the mortgage is something else to consider, but again, not something I want to do. By the time we can buy we’ll be married, probably closer to 30 if not over, and wanting to start a family soon.

  3. I think that in order to compare buying to renting you have to look at the interest that you are paying on the house and not the total repayment figure. 4% interest on a $300,000 home is going to give you an interest repayment (rent equivalent) starting at $1000 a month. The portion of repayment going towards interest will of course decrease each month as you start to pay back the loan. The rest of the repayment is like an investment – you are buying direct equity in the house.

    I wrote a post about the exact same thing comparing buying and renting in the UK a couple of months back – http://savvyscot.com/how-to-get-a-100-ltv-mortgage/ – which you may find interesting!

  4. I live in the Midwest, so housing is cheap. Our mortgage plus taxes and insurance and everything is $969 a month. So I don’t mind buying.

  5. Where we live (Southern Ontario, Canada), our condo’s mortgage/condo fees/property taxes/insurance is approx. $275 more than what we would pay for a standard 2 BD/1.5 Bath apt. in our area (in our same building, in fact). We pay $1475 for the whole kitten-caboodle, but unit owners in our building who rent out their apts are asking a minimum $1200 for our exact same unit. Our housing costs account for about 23% of our gross pay… mind you, our condo fees are quite high because we do have a lot of amenties (pool, exercise room/sauna, 24 hr. security, etc.)…

    For us, the dollar difference in ownership vs. rental was pretty small, so it made sense to buy when we did.

    • AND, if we wanted to rent a 2 bed/1.5 bath in our city (in a newer building with less amenties), our rent would probably be very close to the $1475 we pay for all our housing costs of the condo.

  6. “Seeing that I’m not interested in buying a condo (I hate the idea of HOA’s and Assessments that I have no control over) . . .”

    If these are your only reasons, I wouldn’t be quite so fast to dismiss condo or co-op ownership. These types of ownership are structured rather differently (in a condo you own the dwelling; in a co-op you own shares in an ownership corporation), but basically they provide the same tax benefits as independent home ownership and may have other advantages. For 23 years I have lived in an 800’ sq. ft. apartment as a shareholder/owner in a mixed rental/co-op development on Long Island. My purchase price was far below comparable separate homes, and I pay both a mortgage on my apartment and a monthly maintenance fee to the corporation. This fee covers all external charges (landscaping, garbage, snow, security, major capital repairs like roofing, windows, doors, parking lot repaving, etc.) as well as my property taxes and my share in the co-op’s underlying mortgage. I am responsible for all internal maintenance, but for a small fee I can have the co-op take care of minor repairs like unstopping a clogged toilet or the like. Right now my total monthly charges are far lower than people renting comparable apartments in the same development, and it’s all tax-deductible. (In addition I get a county rebate equivalent to two months’ worth of maintenance charges.)

    As for HOA’s and assessments, these have to be evaluated on an individual basis. Our co-op is financially well-managed and we have had only one small 3-month assessment in all the years I’ve been here. I don’t find the HOA restrictive in any major way on my living conditions. We are not allowed individual washer-dryers because the pipes can’t handle them (a minor drawback), and we are not allowed pets (not an issue for me). But these restrictions apply to renters as well.

    It is also possible to use a condo or co-op as your first home and move up to something larger. Thanks to the capital gains exclusion rules, you can easily avoid paying capital gains on selling the home as well.

    • Even though you haven’t had a nightmare HOA or assessment, the truth is the possibility of it exists. When you buy a house you don’t have to even worry about an assessment, which to me is a huge piece of mind. Glad things are well managed in your unit though, seems like a good situation.

      • That’s why you would want to do your research, which can including asking about maintenance charges/assessments and talking to current residents to get their candid opinion of the situation. (I have been approached on my street a number of times by people interested in buying into our complex.) Yes, of course there can be badly run condo associations, but there are also very well run condos and co-ops. If you find the latter, it could be a good entry point that could cost you about the same as you paying now while you are getting the tax benefits and building equity. I wouldn’t rule out the option, however, as your purchase price is likely to be far less than a single house.

  7. Like Michelle above, my mortgage is cheap, less than $1,000 per month for everything. I also live in an area where property values are slow to increase (and they also barely budged during the housing crisis). But there are times I wish I was a renter, not have to worry about selling if I want to pick up and move, not responsible for major repairs, etc. I think about it a lot.

  8. I did the same mental math for years. My rent was $800 a month, plus 1/2 the utilities – I was sharing a 2 bedroom condo with another person. I loved my cheap rent for a long time – but eventually I got tired of having to find new housemates when people left, and being in a shared housing situation – I wanted my own place.
    To rent the same or equivalent place – 2 bedroom townhouse – by myself, would have meant doubling my rent to $1600 – where I live, there aren’t really any 1 bedroom apartments or townhouses available, and part of what I wanted was to get my “office” out of my bedroom – so a second bedroom was desirable.
    I couldn’t see doubling my housing costs and continuing to pay someone else’s mortgage – especially since I’d been saving for my down payment. So instead of renting a 2 bedroom townhouse for $1600/month, now I have a mortgage on a 3 bedroom townhouse for $1400 a month, including taxes. I live in a high COL area, but I put more than 20% down on the house, to get the payments to where I wanted them.

    • Congrats on making it work out for you. That is super cool. I do think the situation is different for every person. You showed the House Ownership side. I rent my condo out and I make less than what it costs me. But on the other hand, I have the option to go back if I ever want to.

  9. I like where your head is at. I was always told a home is an investment, and at a certain point in life, that’s just what you do if you can afford to. I’m starting to think a home/mortgage belongs in the liability column. Sure, you get equity if the economy cooperates. It’s also nice to have a place you partially own (the bank pretty much owns it until it’s paid off). All of the taxes, maintenance, interest really kills your saving potential while you’re relatively young. I think we would all agree that saving when you’re young is the most important time because of compount interest, reinvestment, etc…

    If I could do it all over again, I would not buy a home until I could pay cash for it, or find a leveraged situation where I would have someone else paying for my mortgage. Maybe buying a duplex or multiplex to live in while other tenants pay it off for me. I also live in the midwest so the logic of paying cash for a house is more attainable out here than the coast.

  10. I totally agree. You have to carefully look at the math and see when (if ever) it makes sense for your situation.

    The other thing to note is that a home has to be large enough/nice enough to accomodate the maximum number of family members you may have living with you. My husband and I only need 1 bedroom, but if we were to buy, we’d want at least 2 (if not 3) even if it will be ~3 years before we’d need the space.

    But… I thought you guys WERE planning on buying soon?

  11. This isn’t really just an unfair comparison, though, but not really a comparison at all, because you would never buy a house with zero down. Is that even allowed anywhere?

    If you bought a $300,000 house with 20 percent down, which you could certainly do without blinking an eye, your monthly payments at 4% over 30 years would be $1,145, which is not even $200 more than your rent.

    Of course there are plenty of reasons to keep renting, and I think you definitely should until you’re 100% sure you want a house, but still, when you do take the plunge, it’s pretty unlikely that your mortgage payments are going to end up being double, or more than, what you’re paying in rent.

    • While this is true, maintenance, improvements, taxes, etc… all are in addition to your calculation. So purely from a cost per month comparison, that would bring the average up.

    • I disagree. Renting allows me to keep all of my cash in the bank. Thus keeping it liquid. If I bought a $300,000 house with 20% down, I’d be $60,000 poorer. That should definitely be taken in to consideration as I would not just typically throw $60,000 in to a single investment, especially when housing in general is not that great of an investment (barely beats inflation).

      No matter which way you slice it, buying gobbles up a ton of our liquidity. Renting doesn’t.

  12. We have been renting for years, but are about to pull the trigger on buying a house (we have an offer in on a short sale). In PA, we pay $825/month for a one-bedroom, 1000sqft apartment. We are trying to buy a 3 bedroom house up the street with somewhere between 5-10% down. The total cost of the mortgage, insurance, PMI, flood insurance, taxes, etc (not counting maintenance) comes to about $850/month. We can definitely get more for our money here by buying than by renting.

    Also, we don’t need a 3 bedroom right now, but since we plan to start having kids in about 4-5 years, we want to get our housing situation settled sooner rather than later.

  13. My reasoning for not buying a house is not a money issue, but rather a happiness issue. If I were to buy a house here in San Diego, I would most likely have to move to suburbs, or to the east county desert where housing prices are cheaper and more affordable. The truth is, buying a house is not a priority.

    We love the city life here in San Diego, and we love living near our friends that live in the city. Why give up those relationships just to buy a house out in the middle of no where. Just because people tell you you’re supposed to buy a house, doesn’t mean you should give up everything else in your life in order to own a home. We will live in that home alone, with friends 30 miles away from us, all for what reason, just to say we own a home.

    Our priority is community. Our priority is being a part of the community/cultures of San Diego. So for now we want to rent in the city, and cherish the people around us.

    • That makes sense to me. Personally, I live in a boring small town 50 miles east of New York City and I would love to be in the heart of Manhattan even if it meant I rented a 250 sq ft studio. Why don’t I do it? First, because my current place is 15-20 minutes from work; second, because even renting a 250 sq ft. studio in New York is likely to cost me 2-4 times what I’m paying now.

  14. One place I think you’re not being fair is your concern about the assessment – yes, it could happen. But in a house as well as a condo your roof could develop holes, your basement could leak, your siding could be damaged, you could find mold – what I’m saying is, sh*t happens in houses as well as condos!

    • True stuff happens in both. But with a house I don’t have to fix my roof or I can at least delay the fix. With an assessment you don’t have a choice.

      • An assessment is likely only if the co-op or condo hasn’t the financial resources to cover its emergencies. It’s something to check into if you were thinking of buying into such a unit. And with a house as well as a condo, there may be times when a leaky roof or basement can’t be put off.

  15. Good discussion. I’m glad you bring up those issues Ninja. I am only 22, but all my life people have been telling me that home ownership is the dream. So, a part of me definitely wants to have my own place that I own. However, I have also seen the negative effects of home ownership like been tied down to a location or housework! Bigger house equals more housework!!!
    It’s hard to figure out what we should want.

  16. Interesting conversation here. It all really depends on the situation and does require a great deal of thought in regards to buying vs. renting. It actually mimics investing for retirement. Buy low sell high 🙂 You really should consider purchasing a home in the suburbs and let the city grow to you. Just make sure you have a strong HOA to protect the value of your home in the future.

  17. I’m probably one of the few people that advocate buying a home. Even though my home has not appreciated, it is paid off. I was lucky and disciplined enough to buy an affordable home and pay it off quickly. I can tell you paying $250/month for property taxes and insurance is better than your $975 in rent. Granted home maintenence can be pricey but it is way less than the difference of $725/month.

  18. Another upside for renting is increased mobility. Should you lose your job, you’re not tied to a physical house. If you find another job in another state, cross country or just somewhere else where there is a job, it’s much easier to move away from a rental than it is a mortgage (see Detroit homeowners, 2008).

    If you’ve got a stable job which allows to you plan on not moving – things are, of course, different.

    Now, lets turn this waffle house into a waffle home.

  19. Would you consider buying an investment property? I don’t know anything about the Seattle rental market, but if you found the right deal you could potentially cover your costs and benefit from the increase in equity that your tenants were providing (and even possibly generate cash flow). You could stay in your current rental as you accumulate enough money to purchase your desired home at the time that you need it (babies probably wouldn’t suit your 1 bdrm lifestyle). A bit of the best of both worlds if you can find it and make it work. Real estate really is its own kind of compound interest- given enough time all you need to do is invest the down payment (and repair costs, if necessary), then let someone else pay off the rest!

  20. Ninja, two questions.
    One, is there ever going to be a GN Post again?
    Two, I was looking at your budget, and it said you have zero for internet and cable, how do you manage it?

    • 1. Yes, I just have to get her drunk enough to do it 🙂 She will be on summer break in less than a month. That’s when I will kick, scream, and beg her to bless the PDITF with another post.

      2. Our utilities are all rolled in to one flat $199/month payment. This includes electric, water, garbage, cable, and internet. Instead of line item each one out I just listed rent as $1175.

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