I see this claim a lot - "you can't save on rent because your landlord has to cover their costs".
But this is only true if your landlord purchased at the time you rented. I rented a $1.8M apartment for $3,000 per month (~1/3 of total ownership costs). That's because my landlord bought 20 years before when the apartment was worth $200k. His monthly costs were maybe $1,000.
I am aware; I was a renter until a couple of years ago. I have rented houses in the East Bay (Alameda, CA) and Seattle, and in each case, my rent was 70%-80% of what the monthly payment on a 30 year mortgage on the same house would have been. The same was true of apartments I rented in Manhattan.
Maybe it doesn't work that way in other markets, but you'd have to be nuts as a renter to pay enough to cover your landlord's mortgage.
As a renter, you may not pay directly for property tax and repairs, but they do come out of your rent
Yes, but what the landlord is paying may be very different from what you'd be paying if you bought.
For example, I know a landlord charging $3,000 per month for a place that would rent for $5,000 (rent control) or have carrying costs of $6,000 if purchased today.
He does just fine since he bought 15 years ago, so his mortgage is $1,500 and his property taxes don't go up more than 1% per year.
So yes, rent must cover the cost of ownership, but not the cost of ownership today.
If a landlord bought a decade ago their carrying costs can be a fraction of what they would be today. So they can still cover costs at a rent level far lower than buying today.
And in HCOL places it’s not unusual for the landlord to not break even on a new purchase when you add up all the costs. Price appreciation (hopefully) makes up the difference.
Your landlord doesn’t save on HOA fees, repairs, taxes, or insurance because they bought 20 years ago. Those are all costs that are charged in present dollars. Repair services want to get paid in 2021 dollars. Property taxes are based on assessments of current value. Insurance premiums are set to cover present replacement costs.
The only thing your landlord saves on by buying 20 years ago is the nominal cost of the property itself, either as a low fixed mortgage payment, or as a paid-off property.
This is just the effect of time and a fixed mortgage rate. If you were able to buy now, in 20 years you could be in the same position with respect to your property costs.
False. Your landlord could have purchased the place at an advantageous time many years or decades before you would have been ready to purchase a home. Thus the landlord could charge less than a current or recent homebuyer could charge while still profiting or at least covering costs.
This is perhaps the biggest argument in favor of ownership. Unless your landlord is _losing_ money on the deal, the price of rent takes _all_ other costs of ownership into account and then adds more on top of that.
If you're renting, you most certainly _are_ losing money on the deal vs. what you'd pay if you owned _exactly_ the same property.
Don't forget that "covering the mortgage" involves building the landlord's equity, so it's not as if this portion is lost to the bank while the landlord has to depend on appreciation. If I "only just cover the mortgage" while renting for the entire term of the mortgage on a house that doesn't appreciate above inflation, the landlord still goes from owning 20% of a house to 100% of a house over that term.
I've heard that argument a lot. Then I calculate how much a mortgage costs for an apartment in a place I'd like to live in. And the mortgage payments are literally more than for rent.
Take SF for example. I'd need $1mil to buy an apartment. At 30 years, that gives me a mortgage payment of $4700.
Rent for a similar apartment is $3400. And I don't have to pay for upkeep.
So if my rent stays the same, I will have saved almost $40,000 in the next 30 years.
I can do a lot with an extra $1300 per month.
Not to mention I can maintain my desired lifestyle of moving every 2 years or so.
That's not 'generally' true, unless youre cherry picking data or buying expensive houses. If that was true, then landlords wouldn't be renting their property out. The standard landlord advice (from any real estate book) is to charge more for rent than your mortgage costs to cover unexpected repairs. Also, several deductions for tax, maintenance, repairs, insurance, etc exist making it even cheaper. https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductio...
I agree with you that owning a home is expensive and I caution friends from buying a home if they're not sure they want to live there for 5-15 years. The hidden costs are insane. Renting has a mostly stable price without the massive emergency spikes of making roof or foundation repairs.
> So what are the added costs that landlords are "saving" renters from?
Utilities will generally cost a bit more. But the real killers with home ownership tend to be large expenses that come due all at once. Roof needs to be replaced, AC unit needs to be replaced, major appliance replacement, foundation problems, any number of expensive things can and will come up.
If you are renting you can expect to save exactly nothing because landlords simply raise rents to whatever level the market will bear. OTOH if you can control your housing cost inflation then you might be able to save.
Note also that "savings" are often strongly tied to share price performance. If you were a mid-career senior engineer who signed a standard $600k/4yr RSU deal at Nvidia in 2014 then by 2018 you were sitting on potentially $8 million.
I appreciate the sentiment, but that's not really true.
If you can afford the rent for your home, you can afford to own it via a mortgage. (Assuming functioning capital markets and assuming low enough transaction costs.)
Something like this has to be true, because that's how landlords pay for their cost of capital and maintenance etc. If rent couldn't cover that, but for some reason home prices still stayed high, and sane land lord would sell the property and put the proceeds in some investment that does cover its cost of capital.
Wait, but someone who could pay the 1% per month for rent could save the 20% downpayment in 20 months and easily afford the mortgage payments as they are less than 1% per month. The only thing that would stop them from saving money is not having a choice, but to pay the huge rent. It's taken me almost 10 years to save for downpayment for this reason: rent keeps climbing up and eats a good chunk of my income.
no, landlords do not willingly operate at a loss. in a really bad market (housing glut) they may be forced to. that's not the situation right now, at least in highly populated areas.
rents are usually going to be at least 20-30% higher than mortgage + expenses, or else the landlords will start selling or go bankrupt.
however, that's the mortgage payment and interest rate from the time it was bought, not necessarily today. so if the landlord bought that investment property 5 years ago, his costs are probably less than 1/2 of what it would cost you today. even if the market rent goes lower than that, he can still be profitable. so, right now, temporarily, it can be slightly cheaper month-to-month to rent in a lot of markets in the us.
the fact that's what the markets are doing says some things about the current and future home sale prices.
>Current renters will have lower potential to save on a monthly basis
It's cheaper to rent than to buy in many markets and if you own you have to factor in maintenance, property taxes, and insurance. It's definitely not as black and white as you're making it out to be.
Right. What I'm talking about is the differential between the carrying costs of ownership, and the cost of renting, which is what's often referred to as 'forced savings'. Nowhere am I saying you don't have to pay rent. If renting costs less than the carrying costs of owning (which it often is), you can take those cost savings to the bank to be invested. This should also be factored into the cost comparisons.
> Finally, one can use the savings from paying rent
What savings?
Rent as you stated already includes anticipated maintenance costs, property taxes, the landlord's mortgage costs, often an agency fee, plus a margin for the landlord.
I don't think I've seen rental rates ever cheaper than a personal mortgage. The main advantage of renting is avoiding long-term commitment but you'll pay a premium for that flexibility. Otherwise there wouldn't be an incentive for landlords.
But this is only true if your landlord purchased at the time you rented. I rented a $1.8M apartment for $3,000 per month (~1/3 of total ownership costs). That's because my landlord bought 20 years before when the apartment was worth $200k. His monthly costs were maybe $1,000.
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