Whether or not comparison of the costs of home ownership and renting
are relevant to a course in personal finance is perhaps itself a
subject for debate. There could very well be different opinions about
that. Personally, I would urge that it is highly relevant. For people
being taught about financial matters in a classroom situation, it
would seem that one of the biggest financial concerns they will ever
face should be part of the curriculum. And, as we have seen in recent
years, a lot of them are in trouble because of poor decisions related
to home ownership. The more knowledge novices are given about all the
matters surrounding home-buying, mortgages, rentals, etc., the better
off they will be, and possibly future financial meltdowns traceable to
real estate lending practices will be less likely.
I agree its relevant.
Much of my approach is how to make decisions and evaluate options and
alternatives... for example if only person you deal with is your
insurance agent, you may only get one picture, or if only entity you
visit is one bank, you may get a different picture.
Another example would be that your budget determines most things
financial... you must live within that. If someone promises
something, could you save more money not eating out 1-2X per month,
cutting groceries by $50, or raising your car insurance deductible
from $0 to $1000. Anything someone "offers" you should be compared
against such simple changes to your own behavior.
Money is black and white on paper. Much of how it controls you (or
you control it) is behavior, and behavior can be modified if you
There is no way one course could change the world, but more
importantly if 5-12 people take a course and make better decisions,
then the community is a better place.
Mathematically and practically speaking, one person making better
decisions does change the world. This is no sentiment. It is reality.
I try to remember that what that one person learns on subjects like
finance typically gets transmitted in part or full to others, in
Those are excellent ideas. One possible approach is to ask: What are
the financial decisions that most people are likely to face in the
future, and which involve the most money? Perhaps extra attention
should be paid to the ones which involve the big money. Another
question that could be asked is: "What do these students already know,
and what new information would be especially valuable for them?" For
example, information on how to avoid scams that are not common
knowledge could be important, because it is possible to lose A LOT of
money if not aware of the pitfalls in investing in things and buying
things, while many good financial decisions help a little and save a
little money here and there, but not on the scale of what it is
possible to lose in the big transactions if not cautious. Also, advice
like starting early, keeping up an investment plan consistently, and
not being put off by temporary economic and banking conditions, etc.
I am of the opinion that renting can make you wealthier because the cost of
shelter is lower. I calculated my own circumstances years ago and I'd save
$600 000 in my local real estate market during the next 35 years by renting.
You don't pay for housing depreciation and constant upgrades, property
taxes, house insurance, emergency repairs, new laws that come into effect,
did I say property taxes?
However most renters I know choose to live paycheque to paycheque and
fritter their shelter savings. Yeah a lot of homeowners buy more house than
they can afford but a great deal of homeowners are forced to save. Sure
many homeowners live paycheque to paycheque too but they are also paying off
principal in their shelter costs.
Homeowners tend to have a bigger picture mentality.
If a renter is going to become financially sound they will need more
discipline because it is not forced on them by bearing the costs of owning
and maintaining their shelter.
That seems unlikely unless the landlord is consistently losing money,
which most do not. For the same property the landlord incurs all of the
costs of any other owner and recovers those costs plus a profit from
the tenant. The only difference between owning for personal occupancy,
owning as a landlord, and paying rent is the tax treatment of of the
expenses which, in the U.S., favor ownership.
That is a good point. Paying off a mortgage is a kind of forced
savings, because, come what may, you have to make that payment every
month. By doing so, you build up equity and eventually end up with a
paid-for house, whereas rent just goes on an on. Calculations showing
that renting is cheaper look fine on paper, but they depend on the
renter having the discipline to invest the difference. It usually
doesn't work out that way in practice.
Don't landlords get to depreciate their rental property? Even if it
has been depreciated by the former owner? They certainly get to deduct
their interest expense.
Most people would never rent a more expensive house because the
higher cost would be obvious.
... > For the same property the landlord incurs all of the
Landlords do have tax advantages, and larger ones can afford a full
time skilled maintenance staff (while a homeowner has to hope he gets
a good Real Estate Agent, Home Inspector, Home Appraiser, Insurance
Guy, then a good Plumber, Electrician, A/C Man, Insulation Specialist,
Roofer, Window Man, Door and Lock Man, Alarm Guy, Gardener, Stove Guy,
Refrigerator Guy, Dishwasher Guy, Floor Guy, Carpet Guy, Pool Guy,
Solar Guy, Handyman, Masonry Guy, Siding Guy, Driveway Guy, Water
Heater Guy, Bug Guy, Deck Guy ... then the Group Therapy, Personal
Therapist, Homeowners' Anonymous, Anxiety Doctor, and Heaven Forbid, a
Lawyer and Tax Guy).
Problems renting do exist: sale to a less scrupulous owner, condo
conversion, thin walls and noisy neighbors, are a few I can think of.
One large advantage often overlooked by renters is their freedom to
give notice and leave - a homeowner has to sell before moving. Some
smaller rental buildings I have seen, even though rare and hard to get
a place in, are really stunning for the quality of construction,
location, grounds, and pride of the owner in his building and in his
personal ethics. Those tend to be Quite Expensive, but if one can
afford it, well worth the money.
Some of the truly defining advantages of owning one's own home are
undeniable, if highly personal. As long as you keep your taxes
predictable and payment current, your home belongs to you. In an
appreciating real estate market, this has substantial cost benefits,
but the intangible aspect of it can be profound, and one's children
feel it, too. Like voting, ownership is a hallmark of freedom - or as
close as we've come to it in this social realm.
... The more knowledge novices are given about all the
Don't forget the balance sheet. Purchase requires a down payment
which means that money won't be earning a return someplace else.
Likewise at the end, the house can be sold at, hopefully, a profit.
That is quite true, but for purposes of a personal finance course for
novices, it might be better to stress the fact that buying a 75K new
car ties up money in the same way and to discourage that kind of
I'm not sure about this at all. Most comparisons that come to this
conclusion don't compare like properties. Shelter isn't just shelter, it's
part of your life and leisure. Sure, living in a two-bedroom apartment with
a small patio or balcony is cheaper than a three-bedroom house with a yard
and two-car garage. But you're not getting as much either. When I compare
what it takes to rent a comparable property to mine, it's not necessarily
less at all. This is especially as time goes by. A fair chunk of
home-ownership costs are fixed due to the mortgage (assuming a fixed rate).
Taxes, insurance, and upkeep will be subject to inflation. Plus, you really
have factor in paying off the mortgage and drastically dropping your costs
In any nice area, the pool of available rentals of more upscale houses is
pretty small, and is often a stop-gap for people who really are interested
in selling and just couldn't get their price. So you're going to have to be
ready to go each year. If you want to live in apartments or small houses,
then things are a bit different.
This certainly looks bad when you list all these things together, but
none of it would deter me from home ownership. One thing to remember
is that these needs do not arise all at the same time, and some of
them never happen. Most homeowners would not need an insulation
specialist, floor guy, pool guy, masonry guy, siding guy, etc., except
maybe once in ten years, and then not all of them in the same year.
And sometimes renters, although not financially responsible for them,
have to wait around for six months before the landlord sends somebody
to do the repairs.
Yes. I was trying to add humor and that good property management
companies have considerable real cost savings, not just expenses and
depreciation. Cost per sf after tax effects might be the 'metric' to
The usage of either rent or ownership is strongly influenced by
personal taste and style. A self-styled lifetime renter would want to
make it a priority to research the building and its managment.
The philosophy is, I believe, that whatever one's product, one does
try to make it as good as one possibly can, and 'the money' is neither
the primary nor ultimately the workable factor.
Don - Sorry, you're comparing a $75K house down payment to the purchase
of an expensive car? And you discourage the house down payment as though
the two choices are equal?
The choice is far from that and rarely a simple "apples to apples"
comparison. The ratio of buying a home to rental cost is not fixed
either over time or by region. I'd suggest the recent housing crash
combined with low rates puts buying in a much better light right now
than either at the market peak or in a few years.
Don't forget, during times of rising inflation, one's pay and one's rent
are both going to go up. The buyer with a fixed rate sees his mortgage
wiped out over time and only his variable costs rise.
But this thread is about a course. It should provide an overview of home
ownership as one option, including the types of financing, but I see a
deeper discussion such as the "versus renting" as a rathole which is
tangential to a finance course.
Universities no doubt offer dozens of courses on real estate (as they
do on how to make money in not-for-profit companies). Ginnie Mae and
Freddie Mac sites give fairly in-depth insight into financing a home,
and for a personal finance overview course, I think those links,
together with suggestions for further reading, in a one-day summary is
probably indicated. As you noted, branching off into any of many
connecting avenues leads to too much depth, or too many canoes in a
movng stream - I didn't want to kill an interesting thread. The
NYTimes article I cited earlier gives the parameters for doing rent/
buy cost comparison.
For theoretical interest, wise selection of quarters can save big
bucks over a lifetime. Maybe someone else has the mind and willingness
to perform a comprehensive analysis, but most living space is dictated
by income opportunity (urban v. country) and that would be a place to
start, followed by regions, followed by job stability, then rent/buy,
and locations and conditions of specififc properties. After that set
specifying money, personal considerations come in. For analysis, the
best that can be done is specifying known money considerations, but
the state of the market is a principal determinant, and that is a
study in and of itself, a circular reference to urban v. country,
regions, etc and the personal considerations of greed and fear.
Rent vs Buy
Rent when you will live in a location for a short time (less than 5-10
Rent when you have little savings (less risk in renting; too much risk
Rent when the cost of renting suits you (should be less short term
than cost of owning)
Buy when you have a long time to live in a given location (school
district, stable job or other)
Buy when you have some savings you are willing to lock into a specific
location (illiquid asset; more risk in rising rent prices, less risk
Buy when cost of owning (or eventually owning) saves you money in
I was not trying to compare the cost of the house down payment with
the cost of the car. I was suggesting that the idea of "tying up
money" that could otherwise be used for investments is similar in both
cases and that the purchase of the car is
something the students could readily understand and be taught to
Yes, I agree. My guess is that many students in the course would have
already decided whether to rent or buy (at least in the near future)
and that technical comparisons like that would not have much value for
them. On the other hand, given a decision to buy, concerns like how to
shop for mortgages, how banks set interest rates, the function of real
estate agents, and so on, would be very relevant and could mean
substantial savings. (And therefore more money to invest elsewhere!)
Yes, true. My guess is that maybe 1 out of 100 renters and buyers make
detailed comparisons of the relative costs. The decision usually
depends on factors apart from money comparisons. However, home
ownership is an area where investment and personal lifestyle come
together. Many people live in their houses for many years without
thinking of finances and then at some point realize that they are
sitting on a product with big capital gains. Of course, if they had
mindlessly sunk money into stocks with the same regularity as paying
the mortgage, the same thing could be true. But it is so much easier
and more tempting to buy and sell stocks at the wrong time, as to buy
and sell houses at the wrong time.