Rent vs Buy Decision

[mattee2264]

I am struggling a bit to get my head around the way of thinking about this.

 

I understand the general logic of buying a place. House prices generally increase in line with inflatiion (because the incomes used to pay rent also rise in line with inflation). And with leverage even a modest inflationary increase of say 2-3% a year can result in double digit returns (although these returns obviously fade as more of the mortgage is repaid). And returns will also be diluted if the "imputed rent" isn't enough to cover interest + property expenses.

 

I also understand the case against renting. The money basically goes down the drain. Whereas when you buy you would hope to recoup any principal repayments when you sell the house and

probably a good portion of the interest paid as well.

 

But I am struggling to translate this into a sensible framework for making an informed decision about whether to buy or rent.

 

Obviously you can compare what you'd pay to rent each month versus what you'd pay to buy (i.e. principal repayments + mortgage interest ). But this seems oversimplistic given as mentioned above you'd hope to recoup mortgage repayments and even interest when you sell whereas the money you pay in rent is lost forever. And also you'd want to factor in that any excess of monthly principal repayments + interest payments over rent could be invested by a renter in the stock market and earn returns of say 7-10%. Also this analysis does not factor in leverage which amplifies returns in most instances.

 

  What is the correct way of thinking about this and working it out based on the numbers?

 

  For example currently I am renting paying around £1,000 a month for a studio flat in a nice area with a fairly stable demographic of young professionals attracted by the fast transport links into the City of London and the West End which has a market price of around £280K and you can get a fixed rate mortgage for 5 years for about 3% per annum (in the UK we do not really do longer fixes). UK base rates are 0.5% which obviously isn't likely to persist over a typical 20-25 year mortgage term. The Bank of England is currently stress testing by adding 300 basis points to a typical introductory rate. And for buy to let investors the stress test is the higher of 5.5% and 200 basis points above a buy-to-let mortgage rate.

 

Given the above what would be a way to translate this into a buy vs rent decision? Obviously not expecting a definite answer but would like to gain a better handle on the correct thought process.

 

 

 

 

 

 

 

 

 

 

 

 

 

[winjitsu]

sounds like you need this calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

 

 

[tombgrt]

 

 

I also understand the case against renting. The money basically goes down the drain. Whereas when you buy you would hope to recoup any principal repayments when you sell the house and

probably a good portion of the interest paid as well.

 

 

Obviously you can compare what you'd pay to rent each month versus what you'd pay to buy (i.e. principal repayments + mortgage interest ). But this seems oversimplistic given as mentioned above you'd hope to recoup mortgage repayments and even interest when you sell whereas the money you pay in rent is lost forever. And also you'd want to factor in that any excess of monthly principal repayments + interest payments over rent could be invested by a renter in the stock market and earn returns of say 7-10%. Also this analysis does not factor in leverage which amplifies returns in most instances.

 

 

This is probably the conventional wisdow. But I do not agree. Living is a very real expense regardless of whether you rent or buy. You either "rent" a home or money. And if you buy outright you still incur opportunity costs (and a combination of opp. costs and loan costs when not buying without loan of course). Few seem to understand this.

 

As the NY Times calculator shows, renting can be beneficial. The added bonus of liquidity and flexibility are also worth something while renting. Not to mention you can't face sudden unexpected costs. Finally, people don't adjust for expenses made for repairs, upgrades (take isolation, barely a thing a few decades ago).

 

Personally I pay 870€ rent for a newly built house (2016) worth nearly 400.000€. (For comparison: I've seen appartments being sold for +-220.000€ for 800€ rent/month.) So you can see my situation seems like a better renting proposition than your studio with a 4.2% rental yield for the owner. So might be a good idea to buy something similar if you have no decent investment opportunities. Personally I'm wary of putting most of my net worth in my home with intrest rates at all time lows when I can make very attractive investment returns. But at some time I'll diversify and take a small loan only to optimalize income taxes.

 

This article by Ken Fisher is recommended as well: https://eu.usatoday.com/story/money/columnist/2018/02/18/why-your-home-lousy-investment-when-you-think-its-great/340516002/

[undervalued]

Why don't you model it in Excel? Get an idea how much return on average you're getting from your portfolio for the last 10 years or since you started investing. Let's say it's 10% per year.

 

Now build a model where you bought a home and make all the mortgage payments until it's completely repaid (don't forget to estimate how much the house is worth then when you sell it). Take the annual mortgage payment as money where you can safely compound 10% per year.

 

See which one worth more after the mortgage payment is completed and the house is sold.

 

The hard part about this in actual practice is your saving/spending habits. Are you the person who can't really pay yourself first? Buying a house is probably a better bet in that case because in practice, you'll probably saving less than if you're making mortgage payments.

[SharperDingaan]

Buy versus rent is not a numbers decision, and it will be decided by your significant other.

Until you settle down, treat the place you sleep as just shelter, build your down payment as high as possible, and spend your time looking for the right person. Your time is better spent focused on the lifetime investment, not the brick and mortar one.

 

As a single young person it makes little sense to buy. You are moving to where the work is, you have no idea how long you will be in city 'X', and you have no idea where your significant other is. Once she/he is found, at some point in the relationship you're going to want to try living together - and the old place is going to go. If you own a property; every time you move its 5% in commissions and another 10-15% (over time) to redecorate the place. 

 

For most folks, first kids will decide it. You will be cocooning in one place for 10-20 years, and the long hold period will heavily favor purchase over rent. The biggest new-build you can afford in a new development, with space to grow into, and trees that will be fully grown by the time you're ready to sell. 

 

Nothing prevents buying in city 'Y', and renting the place out while you live somewhere else (city 'X').

A great many young women do exactly this, and the property is often a shared purchase in a smaller city - shared between female siblings and a divorced parent. The women can get on the property ladder, without having to continually find tennants; yet retain their ability to move for work/romance.

 

Put aside the spreadsheets.

 

SD

 

[Jurgis]

This is probably the best rent-vs-buy calculator: https://michaelbluejay.com/house/rentvsbuy.html It's still US specific though and likely not up to date for the latest tax changes.

 

The number of variables and the unknowable future can make the decision hard.

I somewhat agree with SD:

 

Buy versus rent is not a numbers decision, and it will be decided by your significant other.

[Spekulatius]

Good advice given here. I think in most cases, when the rent yield (assuming you would rent the place you are buyin) is higher than the interest cost (assuming you would finance 100%), I think a purchase is almost a no brainer.

 

if you are married, SD is correct that your wife will make the decision for the most part. if you are single, you may find the unexpected benefit that owning a house will make you more attractive to many women, specially if you accomplish to do so at a relatively young age. 8)

[Guest cherzeca]

putting cost (both direct and opportunity) considerations aside, some people really want to be owners, and some people are just fine being renters, psychologically.  which are you?

[LC]

To be honest, I'd only buy a house if...

1- it's a screaming deal

2- you're setting down to have children

 

Otherwise, rent.

[BG2008]

I will share some personal experience.  15 years ago, my best friend and I were both recent college graduates.  We both noticed that our parents and family built up wealth by investing in real estate.  We do not really understand why, but people who own real estate just seems to be rich or better off.  This is 2004.  We were both working in the NYC area.  Now, let's put things in perspective, interest rate in the US went from teens in the 80s to about 6% during that time.  So any real estate buy decision is a genius move in hindsight.  In 2004, the US just lowered its interest rate after 9/11.  These are important context.  It's also important to point out that the US has 30 year fixed rate mortgages. 

 

With family help, my friend and I both bought property.  He bought on Long Island a suburb of NYC accessible by train.  And I bought in Queens, NY a burrough of NYC accessible by subway.  Commuting into NYC cost $2 for the subway and $6 for the train.  I bought in an ethnic neighborhood with predominant working class immigrants.  My friend bought in a middle class neighborhood where people tend to own.  His carrying cost, lawn, property tax, misc fix are rather high.  $15k total for a single family home with 5-6 rentable bedrooms.  My is less than $2k.  His renting window is to get six students at a local college to share the rental of his house.  My renting window is constant since my building is a 5 minute walk to the subway station.  At one point, we both lived in the city.  When stuff breaks, he has to go fix it which takes longer.  When stuff breaks, I tend to have some handyman who can go in my place.  I tend to have family who can help out.  I'm a bit more handy than him.  The 2008/2009 recession was really the divider between our investments.  I had to deal with some issues like theft/robberies of my tenants.  Things got stolen and crime went up a bit.  By the way, back when we bought.  My neighborhood in Queens would be considered kind of "too ethnic" for most people.  He bought in our hometown which is a 1/3 Catholic, 1/3 Jewish, 1/3 Protestant. 

 

Over the years, I've had 99-100% occupancy.  The longer the years go on, the higher the occupancy rates goes.  My tenants don't want to move.  If they do, I put a For Rent sign up and I get a tenant in there in a few days.  My friend has a 4 week leasing window.  If he miss out on that, he loses rent for the whole year.  His best outcome is if the existing tenants "pass down" the house to new undergraduate or graduate students.  He once rented to the dance team at the local college, as single guys in our 20s it was always fun to go repair stuff and chat up with the gals.  As married men with kids now, this isn't a perk anymore.  New York City really took off after the recession.  The suburbs recovered much later.  But the issues of not being able to rent so easily drags the value down.  He gets stressed out from having to constantly get tenants every couple of years.  Also, his tenant base is very unique.  Most people don't rent on Long Island.  If they do, you find some of the sketchiest people ever.  The one that can pay and makes a lot of sense to rent are servers.  But they look to party and will literally destroy your house.  We had to rent out our family home when we moved into the city.  Our house got trashed and I had to act like an asshole to get the 20 year old party animals to move out.

 

After a few years, his house barely appreciated and my building has appreciated by 80% over 10 years.  Given that we both bought at the peak of the housing bubble, I think I did much better than he did.  What is the takeaway? 

 

1) What is the prospect for rent growth over time?  All real estate is local.  You need to pay attention to the local dynamics.  Is the area getting gentrified?  Is there a big corporate client moving their HQ there? HQ2?  Is there an emerging art scene?  Is your place hidden?  Are they building a new train stop? 

 

2) 30 year fixed rate mortgages are awesome.  Exploit them if you can.  If you can't get them in your country, the decision gets trickier.

 

3) Long term trends really matter and probably matter more than the discount you get initially.  If you feel that a neighborhood is starting to go bad or start to gentrify, those characteristics maybe more important. 

 

4) Cover your mortgage payment.  If you can cover it, then the asset becomes a call options (30 year fixed mortgage, does not apply to 5 year trends).

 

The dynamics that I outlined is very different if you live in a non-land constraint area.  If there are endless supply of land, then you need to buy at a high cap rate.  What appreciates over time is land value, not the interior decoration.  The appliances and interior really do depreciate.  As yourself, are there more land?  Ask yourself, will it cost more money in the future to put up a structure and pay for all the labor and materials?  If you live in a city like NYC, Londong, SF, then the answers point you in a specific direction.  If you live in Rochester NY, the answer point you in another direction.  This is why I hate those rent vs buy calculators.  People need to think, how hard is it to rent?  Is the area getting better or worse? What kind of financing do I have.  If I need to move, can I rent it to someone in 30 days? 

 

For the right situation, buying a piece of RE is a "buy it and forget about it" type of investment that compounds in the teens for 10-15 years. 

 

Another anecdote, my family are barely getting by in my teens.  We took some risk and bought some properties.  We're not the Trump family today.  But we're doing okay.  We collect rent.  As we get older, as I look at my friends from college who are highly educated.  They moved to the city and never bought property.  They still pay rent today.  In away, the poor immigrant family now rent property to the college educated middle class.  I think you need to reverse engineer why that happened.  I suggest looking at your local town/city and see if it's a high quality compounder with ability to increase rent over time or if it's a suburb where everyone will own their property.  If you look at your own town/city and try to determine whether it is a high quality company or a low quality company and think in terms of barriers to entry etc.  You may find that buying is a good decision as long as you have the staying power to hold onto it for a long time. 

 

[LC]

Great anecdote. RE is truly location location location. You need to know where people are going and what is cool. The question I always ask is, "why the F*CK would I want to live in XYZ???" Gotta have a good answer to that question.

[Guest Schwab711]

If you live in Rochester NY, the answer point you in another direction.

 

Hey! At least we aren't Gary, Indiana!

 

But ya, agree with what you said and always nice to read your views on real estate. I am definitely biased against nearly any RE-based investment idea. I think local RE conditions have made me jaded on the whole asset class. Rochester is a particularly unique RE market where prices seem to go up 1%-2% annually over almost any 5-year period. Never much more or less.

[BG2008]

If you live in Rochester NY, the answer point you in another direction.

 

Hey! At least we aren't Gary, Indiana!

 

But ya, agree with what you said and always nice to read your views on real estate. I am definitely biased against nearly any RE-based investment idea. I think local RE conditions have made me jaded on the whole asset class. Rochester is a particularly unique RE market where prices seem to go up 1%-2% annually over almost any 5-year period. Never much more or less.

 

I mentioned Rochester specifically because I stayed with Packer and we drove around.  He mentioned that home prices barely moved during his time there.  We drove through endless plots of land and it made sense that there are almost zero barrier to entry.  Very few markets are like SF, NYC, and London where people want to go to and live there. 

 

I worry about concentration risk.  With the new tax policy punishing high cost coastal cities, I wonder if I'm better off with Texas, Nevada, and Florida.  What's critical today is that so many jobs can be done remotely.  Take myself for example, there is no need for me to stay in NYC.  I can run a fund in the states like Texas, Nevada, and Florida.  The fact that my whole family is here and that fact that you can get soup dumplings at midnight is what's keeping my wife and I here in NYC.

[SharperDingaan]

In the spirit of the thread I will add to this.

 

During the GR2 I were offered a flat in Knightsbridge (London, UK) by a city acquaintance who needed to sell. He needed out quickly, and we were offered a fabulous price - provided we could give him some leeway. It was a lot of money for us, and as the property could not be mortgaged for a time - it meant margining/liquidating the lions share of the family portfolios. Significant risk.

 

The typical UK practice (in Knightsbridge) is that you don't buy land plus the structure on it, you buy the unexpired portion of a 99 year lease on the land plus structure. The lessor then either lives there, or sells a series of sub-leases on the property over time in 1-5 year periods. Everyday operating costs are typically the sub-lessors responsibility.

 

London has worked out very well for us, and we have been able to place the bulk of the gain in the hands of the nephews (tax reasons). Successive returns of capital have repaid the mortgages taken out along the way, and the nephews are now graduating and working in London. When the nephews enter their 30's the flat will be sold.

 

I raise this anecdote because there are times when life-time RE oportunities will be offered, and you must be ready to grab at them. You need to keep your head - while all around you others are losing theirs, and have the courage to call the nay-sayers. In our case we have both investment and quantity surveyor expertise, so the decision was a lot easier.

 

The WEB punch-card is not free.

 

SD

 

 

 

 

 

 

[BG2008]

Buy versus rent is not a numbers decision, and it will be decided by your significant other.

Until you settle down, treat the place you sleep as just shelter, build your down payment as high as possible, and spend your time looking for the right person. Your time is better spent focused on the lifetime investment, not the brick and mortar one.

 

As a single young person it makes little sense to buy. You are moving to where the work is, you have no idea how long you will be in city 'X', and you have no idea where your significant other is. Once she/he is found, at some point in the relationship you're going to want to try living together - and the old place is going to go. If you own a property; every time you move its 5% in commissions and another 10-15% (over time) to redecorate the place. 

 

For most folks, first kids will decide it. You will be cocooning in one place for 10-20 years, and the long hold period will heavily favor purchase over rent. The biggest new-build you can afford in a new development, with space to grow into, and trees that will be fully grown by the time you're ready to sell. 

 

Nothing prevents buying in city 'Y', and renting the place out while you live somewhere else (city 'X').

A great many young women do exactly this, and the property is often a shared purchase in a smaller city - shared between female siblings and a divorced parent. The women can get on the property ladder, without having to continually find tennants; yet retain their ability to move for work/romance.

 

Put aside the spreadsheets.

 

SD

 

This comment needs to be highlighted.  For all of those that thinks buy vs rent is simply a number/financial decision, it's not.  This especially applies when the decision involves your SO and your kids. 

[mattee2264]

 

Interesting perspectives and the calculator was very useful. I plugged in some numbers and came to some interesting conclusions. Basically with the illustrative numbers I mentioned (studios rent for around £1,000 a month and sell for around £280,000) then if I assume a 6% mortgage interest rate I need over 5% annual house price appreciation for buying to work out cheaper.

 

This does not seem outlandish. While above the rate of inflation I think that can be justified for two reasons. Firstly, housing demand growth in London is likely to continue to outpace housing supply growth for at least the next few decades. Secondly, London is likely to remain an international city so a house price appreciate rate somewhere between UK GDP growth and world GDP growth seems reasonable.

 

Although UK house prices stand at over 10 times average incomes probably in good part because houses are made a lot more affordable by a) historically low mortgage interest rates and b) a weak pound (helping foreign buyers). So multiple compression will offset to a good degree the natural increase in house prices in line with nominal incomes and inflation. I guess that is the big uncertainty. In the bubble in the late 80s London house prices peaked at around 6x average incomes then bottomed in the early 90s at just under 3x average incomes. By 2000 they breached 5 times average incomes and pre crisis they reached just over 7 times average incomes before falling back to around 5.5 times income. But between 2008 and today they have risen to over 10 times income! Probably no coincidence this has coincided with Bank of England base rates stubbornly close to zero throughout the last decade! You can also see the impact of foreign buyers because over the last decade the spread between multiples in London and the rest of the UK has widened significantly since 2008.

 

But no idea what a reasonable house price to average income multiple would be.

 

And agree that there are non financial considerations. I am happy in London. I work in finance so London is where all the job opportunities are. I cannot see myself living outside of London. Most Londoners feel like that. And if my future SO doesn't like London then she probably isn't the girl for me! As for personality factors I am fairly indifferent between renting and buying. Although I do like my area and could see myself spending the next decade here. Although if I did get married in the next 5-10 years realistically I would have to upgrade to a bigger place. But that would be easier to do if I had some equity in an existing property.

 

 

 

 

 

 

[tombgrt]

Although I do like my area and could see myself spending the next decade here. Although if I did get married in the next 5-10 years realistically I would have to upgrade to a bigger place. But that would be easier to do if I had some equity in an existing property.

 

 

Don't forget you are incurring some non-recoupable costs by buying a starter home and selling a few years later. In Belgium this is around 10% + redecorating costs etc. so look at your own situation and odds of finding someone / wanting a bigger place.

 

putting cost (both direct and opportunity) considerations aside, some people really want to be owners, and some people are just fine being renters, psychologically.  which are you?

 

And some people are idiots.  :P Why is owning (read: renting money) never seen as the riskier commitment in the short and medium term? You'd think 2006-2009 would have learned people something. You are making serious investments (costs, upgrades, redecorations, ...) into something that is collateral for some serious debt overhang. You better make sure you can pay it off. Obviously over the long and very long term, renting a home is generally riskier for your financial well-being.

 

Buy versus rent is not a numbers decision, and it will be decided by your significant other.

 

Put aside the spreadsheets.

 

 

Hmm, let's make the biggest financial decision of our lives all about emotions, why not. Happy wife, happy life; right?  :P Bit tongue-in-cheeck as you raised some good points, SD. Sadly some people would throw all rationality overboard to be able to say they are home-owners.

 

Been together with my SO for 5 years and she understands the math behind renting vs owning. No need to brush these things aside because you have a SO or even a family. But obviously the feeling of stability has it's value for many as well. I can understand that but it can't come at all costs.

[SharperDingaan]

The housing market changes drastically, new hubby updates the purely 'rational' spreadsheet. You currently rent.

The spreadsheet says buy, new wife agrees, next few months are spent narrowing down neighborhoods (with spreadsheet assistance), and looking at houses. So far so good, all pefectly logical.

 

3 possibles show up. A teardown shit-box that can be rebuilt into whatever you want, #1 choice of the spreadsheet. A good average house that only requires minor updates (remove a wall or two, update kitchen, new appliances, carpet/hardwood, etc), #2 choice of the spreadsheet. A 'well lived in' quaint old house that will require major repairs in a few years, choice #3 way down on the spreadsheet. While construction/upgrades take place, you would continue to rent - minimizing disruption (& stacking the deck).

 

You're informed with a wide smile, and a closing of the lap-top - that it's going to be #3. Because it has the best 'vibe'. WTF!!

No further explanation required. Wife 1, Spreadsheet 0.

 

Some things just cant be done by spreadsheet ::).

 

SD

 

 

 

 

[Dynamic]

I think a lot depends on your personality, and at some point that of your future spouse.

 

If you can live comfortably below your means, perhaps by renting in a cheaper area, you can invest plenty to allow you to be opportunistic in future, perhaps in a stocks and shares ISA at up to £20,000 per year, so the returns are tax free, then you'd be able to build up enough over 5-10 years to see you through most potential difficulties. Being in London with good public transport and a London-weighted salary might help, as you can avoid depreciating expenses like cars. An electric bike and a good lock could shave travel costs even more and buy you a better future faster. If you can also make do without expensive subscriptions for TV and mobile phone call plans you can probably put a surprising amount of capital to work for you. Then you can build up resources to cover you for job-losses, give you financial flexibility or to be opportunistic with property.

 

If a great opportunity comes along in the housing market it could well be worth taking, not directly as an investment but as a cheaper alternative to renting. Buying something of the size you need at a time of severe economic stress could replace your rent, which will go up and down over the years with the economy and inflation, with a lower cost of mortgage plus repairs. If you still have resources left over, you can continue investing in equities. With a rebound in the housing market you might well find the value rises by 30-70% over your purchase price and you could then even get the place revalued when you remortgage to qualify for lower rates (55% or lower loan-to-value is usually the lowest rate threshold in the UK).

 

One conflict you might have as a value investor is whether to buy a discounted flat or discounted stocks. For me, the repossessed buy-to-let flat won, and frankly perhaps I should have mortgaged it to a higher LTV instead of the 55% LTV I chose for the lower interest rate. The flat has appreciated 60-70% from which I should perhaps deduct 8-9% for repairs such a roof renewal, so I've made well over 100% on my equity and now have about 25% LTV thanks to my normal repayments, and my mortgage repayments are now less than one third of equivalent rental cost for my flat. Fortunately after meeting my spouse, the flat passed muster, as did living frugally and investing hard, so we get to live well on one income and invest the other with a view to financial independence being right around the corner.

[flesh]

I'll just add a little tid bit here.

 

Buy a place that has a mother in law apt and rent it out. Ideally it would have a separate entrance and all the amenities, washer/dryer, kitchen, bathroom, separate drive way etc.

 

If you look hard and are patient you probably (maybe not in london have no clue) can find a place like this over time. Alternatively, you may be able to find a place that can be made ideal for a small investment.

 

Also, by doing this you can generally spend a bit more on a place and therefore your portion of the house is nice and if there is appreciation is will be larger.

 

When I subtract what my renter pays me, what's going to principal, assuming no appreciation, my cost to live here (with a mortgage that was originally 80% ltv) is 100/month before taxes and utilities. Why not have your cake and eat it too?

 

My buddy had the place I'm in now and I always told him I would pay him 10k over comps, no realtors fees when he was ready to sell and he was ready 1 year later.

 

ATM, I'm working on design plans in an area of the city that allows it to build a new place that has two 1k square foot apartments with separate entrances in a walkout basement. It will be very cheap for me to live in this new place, in the hundreds a month effectively and the place will cost about 2x my current place.

 

If you are single, use this strategy plus rent out some of the main house and you'll be cash positive before appreciation.

[Gardener]

Although I do like my area and could see myself spending the next decade here. Although if I did get married in the next 5-10 years realistically I would have to upgrade to a bigger place. But that would be easier to do if I had some equity in an existing property.

 

 

Don't forget you are incurring some non-recoupable costs by buying a starter home and selling a few years later. In Belgium this is around 10% + redecorating costs etc. so look at your own situation and odds of finding someone / wanting a bigger place.

 

 

I'm going to have to disagree with you to be honest since I am also Belgian and thus can relate to what a quirky system the government has put in place in Belgium. You definitely don't always lose 10% (ignoring the redecorating costs):

 

For example, say half a year ago I bought a "modest house" (this is really a term that the Belgian government uses but the law is changing as we speak), this means that I pay 5% tax when I buy the house.

 

So let's say I decide to pay EUR 200.000 for a "modest house" => totals EUR 10.000 in tax that I have to pay the government to buy the property. For these kind of house you pay nearly 0% recurring, yearly taxes (let's say EUR 500 per year).

 

If I take out a loan to finance this building, I and a partner (for a maximum of 2 persons) get a tax advantage that equals a little over 900 per year for the first 10 years (so EUR 1800 in total per year or EUR 18000 for ten years). After these 10 years, the advantage drops to about EUR 650 per year for some time longer (decided by a rule which is a bit too long to explain here). Let's say you can get this discount for another 10 years. That's EUR 13000 in tax advantage. So a total of EUR 21000 in less taxes paid over 20 years for a loan taken out by 2 people living in a house. Renters don't get none of these tax advantages in Belgium.

 

Fastforward 20 years later. You sell the house to buy another bigger house. The amount of tax you don't have to pay again on the new house is capped at EUR 12.500 since you already bought a house in the past and paid taxes on that old house. So for the next house, you don't have to pay the EUR 10.000 again which you already paid (under old rules I think they didn't correct this for inflation but I believe from now on they will). The added value that you get when selling the house is exempt from taxes since you lived in it yourself. I constantly see small houses being flipped when they are in effect paying zero taxes, on the contrary they are being subsidized by the government for doing so...

 

So in effect, you bought a house, lived in it and paid 0 taxes (apart from a small, recurring, yearly tax). On the contrary, you received EUR 21000 in less taxes paid. Here in Belgium the tax advantage the government gives you actually reconciles with the cost you incur on your mortgage so in effect they are just handing out free money to leverage and buy a house.

 

* number are a bit of because didn't feel like looking them up in detail but really not by much

 

The house vs. appartment phenomenon you talk about is in large effect because of a very strange taxation system in Belgium called "kadastraal inkomen". It in effect states how much taxes you pay on a piece of real estate, regardless of how much rent you actually receive. It is completely outdated. It makes a lot more sense (not in all cases but in a lot) to rent out an appartment than it is to rent out a house (especially a new house like you are renting), hence elevated prices for appartments, "modest houses", ...

 

 

 

 

 

 

[tombgrt]

Absolutely correct on the "not losing 10%" part, I was too quick to post that. Also agreed on the tax benefits. Even if you don't need the loan, you'd be stupid not to take it. But you still incur notary costs, redecoration costs and a sizeable purchase tax (you don't recup fully) unless you don't care where you live or buy something very small. I'm also looking at a timeline of 3-5 years after which one would buy a new property. Obviously when you buy one after 20 years, even a 10% tax and 10% redecoration costs / fixes wouldn't matter much.

 

As an aside, I'm also not looking to buy a 200k appartment, even as a starter home. Most homes I'd look for as a starter home start at 300k, so that is 30k in taxes (because at 10%) plus notary costs and small redecorations. Living in an expensive city I'm afraid! (I'd rather keep my investing going and buy my "forever" home in a few years. But that is just my situation.) Sure, the tax is dropping to 7% in Flanders but is still 12.5% in Brussels and Wallonia if I'm not mistaken so for Belgium as a whole it evens out.

 

Anyway, my general point was: Watch out for all costs and likely events when considering a starter home. If OP meets the love of his life in 2-3 years time, buying a starter home might be a bad deal depending on the tax situation in his country and the specific state of the property. I'm sure you agree with this general sentiment.

[HalfMeasure]

This is a topic I've thought about a lot (Canadian, so no tax deduction on interest in my assumptions).

 

First and foremost, I think about the total cost to me of renting vs. the total cost of buying (assuming a similar property). On the rent side this is pretty straightforward, but on the cost of buying I consider all economic costs ex-principal payments thus: i) interest costs; ii) property tax; iii) insurance; iv) maintenance; v) opportunity cost of down-payment capital. E.g. the monthly cost to buy a $500,000 house with 20% down at call it 3% would be something like i) $1,000/mo in interest; ii) $250-300/mo in property tax (~6-7%); iii) $75/mo in house insurance; iv) many use 1% as a "rule of thumb" so for the sake of illustration call it ~$300-400/mo; v) assuming a low 3% cost of capital (same as mortgage interest) would get you $250/mo in opportunity cost on having $100k tied up. This gets you to something like $1,875 - $2,025. I don't consider principal pay-down an economic cost. While the conventional wisdom is that rent is "money down the drain", it's no more so true for rent than the above expenses.

 

Now, I think what the above exercise provides is a clear line in the sand on how much money you're putting "down the drain" even if you buy. Then I consider the difference between monthly rent and the true monthly economic burn rate of buying, and I frame it in terms of a liquidity and risk premia that either I'm paying or I'm being paid for. E.g. if my rent costs $2,200/month for a comparable place, you could say I'm paying $200-300/mo to avoid price risk on a house and to avoid illiquidity. Realtor fees look gargantuan compared to this differential in burn rate (how many months of $200-300 incremental burn would it take to justify paying a realtor 4-5% of $500k??). Now, on the flip side maybe my rent is $1,600 but I really want the $500k house because it's my dream home and I plan to live that forever - that's fine, but I would just consider that incremental $300-400/month in economic burn rate as an amount I'm spending on the call it "consumption benefit" of owning the house versus renting, nothing wrong with that as long as I know that's the decision I'm making. Alternatively, maybe I'm really bullish on the housing market and I'm willing to pay up $300-400 on a monthly basis in the second scenario to make a bet on housing.

 

Don't mean to impute any value judgments or bias in my above analysis because it really all depends on each person's situations, but this is the framework I find most helpful to really parse the decision. Though to be clear, I do feel that conventional wisdom oversimplifies the decision by framing rent as a cost and mortgage payments as an investment.