There are plenty of places that rent far below what they cost the landlord in mortgage/taxes/HOA/repairs/etc.
Home ownership, especially buying a home as an "investment" is such an emotional thing that plenty of people buy property just to buy property, the math doesn't come into it. Most of the time, even with the appreciation of the property that they sell, the landlord would have been better off putting their money into other more liquid investments with higher returns.
But, many people just buy property because they don't know any better.
You're assuming that all landlords are rational. Many either see it as a leveraged investment where rent is just one factor to offset their cost, hoping that appreciation will make it profitable. Or the home had strong appreciation so that their cost relative to the current value is low. Or they have some sentimental attachment to the property and rather rent it out at a loss than sell it. In California especially, they might have locked in a low property tax rate which is a fraction of what you would pay when you buy the home today. For example, my in-laws pay $700/month in property tax. If I bought their house at market price today, my property tax bill would be $3,000/month.
For example I rent a home that's currently worth $1.3 million for $3,500/month. The landlord bought it in 2004 for $570,000. Would it make sense for the landlord to sell it instead of renting it out? Maybe, but based on their original investment they're getting a good return. If I were to buy that home off of them, my monthly payment would be more than double the rent. So this works for both of us I guess.
I find this incredibly hard to believe, especially when it's not hard to find people that buy houses for the sole purpose of renting them out[0]. In order to ensure you at least break even in the short term, you'd need to charge a rent at least equal to the mortgage + property tax.
Given a market that is in any way sensible, shouldn't buying wind up cheaper than renting over the long run? Landlords don't buy investment property out of the goodness of their heart, they buy investment property because they think that the money they make in rent, plus the capital gain on the property, minus the various maintenance costs etc, should be sufficient to compensate them for tying up hundreds of thousands of dollars in the asset.
Not necessarily. When the capital gains from simply sitting on a property are so great, I'm sure a lot of landlords are actually making a net loss on a renting operation, and don't care all that much.
Regardless, the point is that a lot of people see the mortgage repayments equalling the rent and don't think about the extra costs of ownership.
This cannot be overstated. I think many of us see the mortgage, taxes, and insurance are less than rent and call it a win. We are vaguely aware of the money pit and getting out issues but they are hard to predict and easier to sweep under the rug. This conversation should always be accompanied with, "Assume $5k per year for maintenance," or some related concrete number based on condition and size, so we force ourselves to deal with a number instead of brushing it off. Also, real numbers for seller's closing costs.
Still, I think for most markets in the US anyway, buying does make economic sense if you plan to stay in it for several years and enjoy or don't mind taking care of a building, to use peer's phrase.
If you wanted to buy that same house, your mortgage would be about $2200/mo, PLUS property taxes. And in the first ten years of the mortgage, it's almost all interest. So instead of a landlord you're paying the bank to rent your property from them, but now you have to maintain it.
And repairs almost never increase the value of your property -- usually they just return it to expected value. When you sell a house, it's assumed that the plumbing and electrical work, and that's baked into the price. If they don't work, you have to make them work.
The only upside is that you get to keep the appreciation in the land value.
Basically, in the most expensive markets, financially it almost always makes sense to rent instead of own, assuming you invest the money you save by renting. Owning makes sense for non-financial reasons, like having more control over your living environment and a sense of place.
If I read that correctly, it sounds like you’re assuming that rent is lower than buying, which is not true in many places (including my own city). Many people buy rental properties because they can charge hundreds more dollars...
Just curious, are you in the area? It's anecdotal, but the folks I know here who are buying tend to do it because they are either sick of the landlord/tenant dynamic, or because of their family. In addition (also very anecdotal, but N of >10) the ones I know who are buying for investment are usually more focused on solid rental cashflow rather than capital appreciation (although it of course still factors into the purchase decision).
This is dual to "the rise of wealthy foreign landlords that buy homes site-unseen as investment properties."
My wife and I, despite being able to afford a home, have chosen not to buy one. Why? Because home prices in our area run at $2.7M for a 3BR [1], while we're paying $2600/month to rent a 2BR townhome. People we know who have bought are now paying $6-7K/month on housing, for something not much better than what we have (they have a yard and an extra bedroom, but we have a pool). Even with the mortgage interest tax deduction, you're still paying more on interest alone (let alone principal, property taxes, or maintenance) than we're paying in rent.
[1] This is perhaps an overestimate - it was a news story about a couple that were outbid 4 times and wanted a fairly nice property. But even so, minimum prices on a 2BR condo in the area now range around $1M+, so the math still doesn't work out.
As sibling comments note, not necessarily due to appreciation being baked into housing costs.
Additionally, the owner and renter may have different risk tolerances where in the renter is comfortable putting cash in the stock market, the owner might want lower-risk, lower-yielding assets.
Finally due to tax distortions, the owner may have a better deal on their own house than a prospective new owner could get.
Correct. When rents get too far ahead of mortgages, people simply buy property instead.
In your first example, the landlord is amortizing expenses by charging rent above their ownership costs. It doesn't have to be at or higher than then current new mortgage rates.
The second example does happen. However, if the landlord's bet is wrong, and they have the runway to float the extra expenses for a while, they can simply wait for rents to rise and over decades make it back and begin amortizing then. Or they can sell and hope to make it back.
Property owners have many more financial options with their property than do renters.
Renting is cheaper than buying? That really doesn't make sense, and I don't think that's the case in most markets. In California, it might because of the funny way they do property taxes there, where new buyers get stuck with huge property tax bills but long-time owners are grandfathered at far lower rates, so the landlords are likely people who've owned the house for ages. Other states just aren't like this.
Well because the property is extremely overpriced when you consider market rate rents the yields are extremely low. You can only charge as much rent as the market will bear, which in some ways makes rental completely different to ownership prices.
Basically the people buying it don't deam the return on renting it worth the risk of a bad tenant or worth the hassle.
They don't need cashflow, are either using it as a safe holding of value or as a quick escape property if they need to leave insert country here for political reasons.
In cases where rent exceeds the mortgage, I think the reasons would be to cover the cost of capital, risk, and operational expenses. In this case, the long term expected value of the property might be flat or growing at a lower than average rate so future expected gains can't be used to offset short term losses.
If this wasn't the case, in theory renters would just become buyers themselves.
This is ridiculous, there are many cities where it’s
vastly cheaper to rent than to own.
Look at London or Barcelona for example. Landlords in these cities aren’t hoping to come anywhere near covering their mortgages with rent payments, they are hoping to profit from real estate appreciation.
This is really basic economics, it’s incredible to see people railing against this on HN. Even the home-ownership obsessed US is full of cities where it’s a vastly better financial decision to rent instead of buying.
Home ownership, especially buying a home as an "investment" is such an emotional thing that plenty of people buy property just to buy property, the math doesn't come into it. Most of the time, even with the appreciation of the property that they sell, the landlord would have been better off putting their money into other more liquid investments with higher returns.
But, many people just buy property because they don't know any better.
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