A Conclusive Argument Against Rent Being Dead Money

Hanley

Why is rent not dead money??

It seems to be the stock response from people who don't really understand the current market, but I'm struggling to come up with conclusive arguments as to WHY it is dead money.

Basically I've got this;

Person A: "Rent's dead money, all you're doing is paying someone elses mortgage"

So how does one respond...??

Rent is NOT dead money because;

-The amount you pay in rent per month is less than the amount you'd pay on mortgage costs for an equivalent property. Furthermore, the initial few years mortgage repayments (roughly how many years actually?) are primarily going to be interest, and not actual capital repayments. So in essence, both avenues are "dead" money. However if the amount of interest on your mortgage repayments is roughly the same as your rent, then by renting you insulate yourself against interest rate increases and market corrections.

-You can save the difference between your rent and the possible mortgage repayments and use this money to reduce any future mortgage costs. Say for instance rent is €200 less per month, you're saving the guys of 5k a year. Over 4 years that's 20k ex interest. This is assuming no wage increase. Realistically if you're in a solid profession (say accounting for instance) you should be making salary increases/bonuses yearly. And with declining prices at the moment, you'll probably pay a similar amount for the property in 4 years anyway (maybe slightly less or more) so you've already knocked at least 20k off the base cost, and any interest payments that would accrue on this down the road.

How's that sound for an argument against rent being dead money?? Anything to add?? Or have I missed/got anything wrong??

mkdon05

Hanley wrote: »

Why is rent not dead money??

It seems to be the stock response from people who don't really understand the current market, but I'm struggling to come up with conclusive arguments as to WHY it is dead money.

Basically I've got this;

Person A: "Rent's dead money, all you're doing is paying someone elses mortgage"

So how does one respond...??

Rent is NOT dead money because;

-The amount you pay in rent per month is less than the amount you'd pay on mortgage costs for an equivalent property. Furthermore, the initial few years mortgage repayments (roughly how many years actually?) are primarily going to be interest, and not actual capital repayments. So in essence, both avenues are "dead" money. However if the amount of interest on your mortgage repayments is roughly the same as your rent, then by renting you insulate yourself against interest rate increases and market corrections.

-You can save the difference between your rent and the possible mortgage repayments and use this money to reduce any future mortgage costs. Say for instance rent is €200 less per month, you're saving the guys of 5k a year. Over 4 years that's 20k ex interest. This is assuming no wage increase. Realistically if you're in a solid profession (say accounting for instance) you should be making salary increases/bonuses yearly. And with declining prices at the moment, you'll probably pay a similar amount for the property in 4 years anyway (maybe slightly less or more) so you've already knocked at least 20k off the base cost, and any interest payments that would accrue on this down the road.

How's that sound for an argument against rent being dead money?? Anything to add?? Or have I missed/got anything wrong??

People say renting is dead money because in its simplist form, Bob and Jim live next door to each other. Bob is paying a mortgage and Jim is renting. If they continue with their current situation for 20 years, Bob will have an asset whereas Jim was only leasing (in accounting terms:D)


There are ways to make a bit of a saving long term while renting, but you risk these savings against inflation, economic climate, mortgage lending criteria etc...

A lot of people would also like to mould their living space to how they want it, which is out of the equation when renting.

THese arguments would be a lot more geared to people in their very late 20's to 30's.

Anyone younger than that should be out enjoying their youth not bound by mortgages.

Deadeyes

I've always been of the "Dead money" belief, but I'm not so sure anymore. Renting gives you a certain freedom. You don't have that huge debt hanging over you perhaps affecting decisions for fear of losing your home. It's a lot easier to move on, or downsize should the need arise. Plus the other half won't get anything in the divorce settlement.

P.C.

mkdon05 wrote: »

People say renting is dead money because in its simplist form, Bob and Jim live next door to each other. Bob is paying a mortgage and Jim is renting. If they continue with their current situation for 20 years, Bob will have an asset whereas Jim was only leasing (in accounting terms:D)

Do the maths -

Bob pays his mortgage, and has to maintain his house. At the end of 20 years, Bob might have paid off his mortgage, but, now look at his maintenace costs again, and don't forget that by now, the wife probably wants a new Kitchen.

Jim, pays his rent, and his Landlord has to take care of the new Kitchen and any other maintenance costs.
Jim can move whenever he wants, at very little cost to himself.

It is a choice, but one is not cheaper than the other. The costs are about the same, and don't forget - 1.) you can't take our house with you; 2.) we don't all have children to leave our house to.

spockety

I'm not arguing for either camp, I can see both sides.

However, I find it hard to read the calculations when at the back of my mind I always wonder:

If you have a 30 year mortgage costing 1500 quid per month, you pay that same amount (fluctuating with interest rates of course, up OR down), at the end about the time you retire and your income drops, you own the house outright and have no concerns about affording repayments.

If you rent a similar property, in or around the same cost per month (for the sake of argument ok?) , you pay out 1500 per month initially, but over 30 years of inflation and so on, surely that will rise to the point where you are paying out a lot more. Could be by the time 30 years pass you will be paying 3,000 whereas the guy with the mortgage is still paying about 1,500. Yes you will be earning more along with inflation, but it's still more than the other guy is paying out. After 30 years, you hit retirement, and your income drops, yet you still have to pay out rent, where as the other guy who bought his house owns it outright and is sorted into his old age.

I have never come across a renter who actively looks at what a mortgage would cost, and put aside the difference in some life saver account that accrues huge compound interest for them over the long term, human nature isn't like that and I'd say most people don't have the discipline to do it.

So for all the facts and figures that are put out about yields, interest rates, and so on, it still looks to me like the guy who pays out the 1,500 a month mortgage for 30 years in a real life situation ends up in a better position, as he has no worries in retirement, and has a valuable asset to pass on to the next generation of his family?

I understand that mortgages aren't for everyone and that renting is a very good idea for a lot of people, but from what I have seen, a lot of pro-rent debaters rarely concede that for a lot of people a mortgage is a good idea, why is that?

For every renter, there must be a buyer, otherwise who are they renting off?

That is tongue in cheek by the way. I am talking about the average person bringing up a family thinking long term and has no interest in property investment as a money making vehicle...


p.s. By the way, is it not the case that a mortgage costing more per month than rent would of the same property is as a result of the recent 'boom', and that in a normal every day healthy market, the reality is that the mortgage SHOULD be less than the rent so that the landlord/investor can make a profit on his tenants or put aside the rent/mortgage difference into a 'sinking' fund to cover the cost of maintaining the property?

spockety

P.C. wrote: »

Do the maths -

Bob pays his mortgage, and has to maintain his house. At the end of 20 years, Bob might have paid off his mortgage, but, now look at his maintenace costs again, and don't forget that by now, the wife probably wants a new Kitchen.

Jim, pays his rent, and his Landlord has to take care of the new Kitchen and any other maintenance costs.
Jim can move whenever he wants, at very little cost to himself.

What about Jim's wife? Does she not get the kitchen she wants?

Hanley

spockety wrote: »

I'm not arguing for either camp, I can see both sides.

However, I find it hard to read the calculations when at the back of my mind I always wonder:

If you have a 30 year mortgage costing 1500 quid per month, you pay that same amount (fluctuating with interest rates of course, up OR down), at the end about the time you retire and your income drops, you own the house outright and have no concerns about affording repayments.

If you rent a similar property, in or around the same cost per month (for the sake of argument ok?) , you pay out 1500 per month initially, but over 30 years of inflation and so on, surely that will rise to the point where you are paying out a lot more. Could be by the time 30 years pass you will be paying 3,000 whereas the guy with the mortgage is still paying about 1,500. Yes you will be earning more along with inflation, but it's still more than the other guy is paying out. After 30 years, you hit retirement, and your income drops, yet you still have to pay out rent, where as the other guy who bought his house owns it outright and is sorted into his old age.

I have never come across a renter who actively looks at what a mortgage would cost, and put aside the difference in some life saver account that accrues huge compound interest for them over the long term, human nature isn't like that and I'd say most people don't have the discipline to do it.

So for all the facts and figures that are put out about yields, interest rates, and so on, it still looks to me like the guy who pays out the 1,500 a month mortgage for 30 years in a real life situation ends up in a better position, as he has no worries in retirement, and has a valuable asset to pass on to the next generation of his family?

I understand that mortgages aren't for everyone and that renting is a very good idea for a lot of people, but from what I have seen, a lot of pro-rent debaters rarely concede that for a lot of people a mortgage is a good idea, why is that?

For every renter, there must be a buyer, otherwise who are they renting off?

That is tongue in cheek by the way. I am talking about the average person bringing up a family thinking long term and has no interest in property investment as a money making vehicle...


p.s. By the way, is it not the case that a mortgage costing more per month than rent would of the same property is as a result of the recent 'boom', and that in a normal every day healthy market, the reality is that the mortgage SHOULD be less than the rent so that the landlord/investor can make a profit on his tenants or put aside the rent/mortgage difference into a 'sinking' fund to cover the cost of maintaining the property?

All very good points as to why renting long term may not be a good idea....

I should probably clarify my poisition. I was talking about renting as a short term option instead of jumping on the property ladder straight away!

Like assuming house prices remain relatively flat over a 5-6 year period, is it a better option to rent for that time and save as much capital as possible and THEN buy (money that would have otherwise been spent on a mortgage, upgrades and maintenance)?

I know it's a pretty simplistic model, but there are other factors to consider. Chances are, the first home (house or apartment) you buy isn't the one you plan on living in for a prolonged period of time. I know I wouldn't be able to afford where I want to end up living initially. So that means you're going to end up paying transaction costs when you move. I'll admit I'm not too sure as to how FTB rules apply, but presumably you make a greater saving on more expensive properties, so if you can, you're better off waiting to maximise any saving you stand to make?

But I may be miles off on all of that...

mkdon05

Sadly Jim's wife has been knobbing the nextdoor neighbour and Jim has just found out, So a kitchen is out the window, on the plus side though, he is just moving out and finding another place to live. fcuk her.

Bob's wife on the other hand has no idea that he has been bending Jim's wife over the kitchen sink, but when she does find out, there is going to be a real bucket of Shiat to deal with.

gurramok

Buying in a good area hardly never equals the same amount forked out for renting in that good area, in fact its alot more and thats what appeals to renters.

Just look at the yields!

For example, buying a 300k house in Dublin is only possible in outlying or dodgy areas and will cost you 1700 per mth. Renting a house within the city limits can be about 1200-1500 generally so quality of life is alot better as well as the ability to save the difference for a mortgage/rainy day.

I think its a balance of having less debt around your neck when buying(prices at bottom) while renting beforehand to have that better quality of life and save a packet.

swiss

You should take a look at a Rent vs Buy analysis that I think spells out the arguments in favour of renting and buying, and when you should do either fairly clearly (its on a placeholder website but will be put up on www.irishhometruths.com shortly).

Dodge

Why are people assuming that rent is cheaper than a mortgage? It certainly wasn't in my case.

There are plenty of non-financial reasons to rent though

spockety

swiss wrote: »

You should take a look at a Rent vs Buy analysis that I think spells out the arguments in favour of renting and buying, and when you should do either fairly clearly (its on a placeholder website but will be put up on www.irishhometruths.com shortly).

It is hardly a fair 'pros and cons' argument on that site though, the bias towards renting is obvious in whoever wrote it. The pros of home ownership get about 5 lines, the pros of renting or reasons why you shouldn't buy get about 15 lines!

There are a lot of cases where for people it makes sense to buy as a long term home. Although I agree that for a lot of people and cases it makes very good sense to rent, I struggle to accept that it makes sense in a 30+ year long term home occupancy situation. The argument that renting is cheaper than buying right now in Ireland makes sense if you look short term, but if you look long term 30+ years, the rent is sure to go up over that time, but the mortgage repayments remain static and for a finite period.

The negatives in home ownership listed on that site like estate agents fees and stamp duty are a one off and rolled into the initial downpayment or mortgage anyway. Management fees don't apply to most houses in Ireland either.

"Someone else pays for the repairs". This is not true, unless your landlord is a charity or something! In a normal market your rent should be covering your landlord's costs, including mortgage and repairs etc. Right now due to the bubble that is not the case for any landlord who invested during the bubble, but as rent goes up over a long period it will swing back in the landlord's favour, and landlord's who purchased pre-97 are already ahead in that game.

The entire section related to calculating the cost of renting versus buying is incredibly short term sighted. It basically tells you to compare the cost of renting NOW with your mortgage repayments NOW, and makes no allowance for inflationary increases in rent over a 25 or 30 year period.

It's ironic that a group called the "Irish home buyers association" are so pro-rent biased, unless the title is wrong and they should be the "Irish investment buyers and landlords association"?

I've been a liver-at-homer, a renter, and am now looking at my options to settle with building a family in mind, and I see the merits in different situations having different possibilities. But I have to say I have rarely if ever seen a pro-renter debater concede that there are situations in which it is a good/better option to buy. Settling in a home for the rest of your life (what is wrong with this anyway, people have done it for generations?) has to be one of those situations, surely?

swiss

It basically tells you to compare the cost of renting NOW with your mortgage repayments NOW, and makes no allowance for inflationary increases in rent over a 25 or 30 year period.

Of course it makes the comparison now, because now is an appropriate time to make the comparison. It makes tonnes of sense to save equity in a falling market when there is a marked differential between rent on a property and the interest repayments on a mortgage on the same property given current property prices. Long or short term, as long as that situation holds, then holding off purchasing (all other considerations being equal) is the prudent thing to do.

If and when that reality changes (i.e. property prices stop falling or even appreciate once more) then it might make more sense to buy, especially if you intend to stay in the same house for 30+ years. That is a long term view.

Dudess

I can understand anyone wanting their own place eventually, but until then, I really can't see how renting is dead money - it's a service for which you pay, like all services.

esmeralda

It's roundabouts and swings but what pushed me to buy, and it was a big sacrifice, was an inexplicable need to have a somewhere I could call mine and do out exactly how I want, and the very explicable fear of reaching retirement age and having to pay a rent out of my pension.

Although I knew it would involve certain sacrifices and problems if someone had told me exactly what I would have to go through in the end (in my case anyway) to get my own place (not only the sacrifices but the traumas of buying in a seller's market, etc) I probably wouldn't have done it, but now that I have it has given me a stability and peace of mind and pure enjoyment of doing what I want in my home that is far greater than I imagined it would be.

Like I said, roundabouts and swings.

sorella

It is hard to generalise. As a houseowner, we found that getting essential maintenance work done was nigh impossible. And costly. If you are young and able, then this will not be such a problem. In rented accommodation, with a responsible landlord, repairs are done swiftly and at no cost to us. Because it is his house after all.
And many are amenable to improvements etc; it is easy to tailor a rental to your own tastes.
If you can avoid old furiiture that the landlord does not want being introduced:) we once had three huge wardrobes in one room..

irish_bob

you know the saying when everyone else is running , you should stand still , well in this country we have a culture of home ownership like almost no other country so i believe as a result thier are opporotunities for those who are willing to buck the trend and rent

oh and as for saying rent is dead money , you might aswell say petrol you buy for your car is dead money

Hanley

This thread is really developing into exactly the sort of discussion I was hoping for, so thanks to everyone so far!!

How about some arguments in favour of buying instead of renting?

Does TRS bring the price of buying closer to that of renting? (say for instance on a 300k dwelling)

If you buy a house with a total floorspace over that as outlined for FTB'ers, do you lose ALL the benefits, or still retain a proportinate amount when it comes to TRS and lower stamp duty??

irish_bob wrote: »

oh and as for saying rent is dead money , you might aswell say petrol you buy for your car is dead money

The reply would be; "You need petrol in your car to go anywhere". People tend to take a very simplistic view as to WHY rent is dead money (ie "rent is dead money because you're paying someone elses mortgage and not your own"). It's one of those statements that I KNOW to be intrinsically wrong, but no-one would believe me when I told them!!

It really depends on where you are in life and what suits you.

My other half and I each pay 600 quid a month for the mortgage on a three-bed semi in Dublin. At the moment I'm 'overpaying' the mortgage to knock a few years off the term.
It's not in a 'dodgy' area either .... not all FTBs have gigantic mortgages despite what some would have you believe.

Cost is relative to what you earn, obviously, and for us it's fine. The house is a 10 minute drive from work and close to everything I want to be close to. We like where we live and have no plans to move.

I was lucky enough to get a tracker rate of ECB+0.75% back before the banks imploded.

We hope to have a baby in the next couple of years and there was no way in hell I wanted to be renting with a child.
I like having three bedrooms and a front and back garden, my own driveway and all my own furnishings and for me, at this time in life, it's where I want to be.
I didn't want to be 35 or 40 and just starting to repay a mortgage.

I don't think renting is dead money. As I said, it all depends on your own circumstances and what you want in life.

johnnyskeleton

spockety wrote: »

I've been a liver-at-homer, a renter, and am now looking at my options to settle with building a family in mind, and I see the merits in different situations having different possibilities. But I have to say I have rarely if ever seen a pro-renter debater concede that there are situations in which it is a good/better option to buy. Settling in a home for the rest of your life (what is wrong with this anyway, people have done it for generations?) has to be one of those situations, surely?

You must have met some fairly indoctrinated renters. Most people, in my experience, who argue the pro-renter side do so not out of a dogmatic loyalty to renting, but because it makes financial and personal sense for them to rent. If anything, the pro-purchasor argument is more intrenced - they are the ones who say "rent is dead money", whereas no renter would say that mortgage payments are dead money or anything of the kind.

There are situations where it is better to buy than to rent, which I divide into financial & personal considerations, and the wider economy.

Financial Considerations:
1) Is the mortgage interest greater, less than or equal to rent. All other things being equal, whichever of these two is cheaper is the better option?
2) For the same money, can you get a better property by renting or buying?
3) Do the tax and government incentives of renting/buying (tax credits/TRS) outweight the hidden costs of same (e.g. maintenance, managment company, stamp duty, solicitor, etc).

Personal Considerations:
1) How secure is your job (more secure makes purchasing more attractive, less secure renting)?
2) Do you feel comfortable with the security of a lease as opposed to ownership (i.e. does "owning the place mean something to you or is home wherever you leave your hat)?
3) Do you plan to move in the short term?
4) Do you want to try an area before you buy (so to speak) or are you happy to take the plunge and buy before living there?
5) Is there a property for sale / for rent in the area you want to rent in (obviously if you want to live in Ballsbridge and there are no rentals, only houses for sale that will decide it for you)?
6) Do you mind dealing with a landlord, or would you prefer to be your own boss?
7) Do you want to live on your own (or with partner) or have a flatmate (renters are reluctant to live with an owner occupier)?
8) Are you planning to get married / have kids in the short to medium term?

Wider Economic conerns:
1) Are interest rates likely to increase / decrease (and if they increase can you comfortably swallow that increase)?
2) Are house prices likely to increase or decrease (it almost never makes sense to buy over rent when house prices are decreasing)?
3) Are rents likely to increase or decrease?

Of these, wider economic conerns have dominated the property question for the last 15 years. From the early 1990s to 2006 it always made sense to buy over rent because of huge capital appreciation and low interest rates. During this period, for the majority of people the only factor was whether to be on the property ladder or not. Owning anything other than an absolute dud of a property made much more sense than renting, hence the idea that rent is dead money. A typical house would increase in price by more than the annual repayments in any given year. Thus, if you bought during this time and sold in 2006, you would not only have effectively lived for free, but would have made a tidy profit out of it.

Now the dynamic is the exact opposite. By taking out a mortgage you are agreeing to pay interest at 6% and face drops of 12-15% annually for the next few years. This is even more dead money than rent, because if you lose your job you get turfed out of the rental property and that's it (bar a few months back rent). But if you own and lose your job you could have to sell at a massive loss (in the tens of thousands).

So in summary, if someone buys, the property goes down in value, they sell and are left with a personal loan to cover the negative equity, that's the real dead money.

the_syco

johnnyskeleton wrote: »

This is even more dead money than rent, because if you lose your job you get turfed out of the rental property and that's it (bar a few months back rent). But if you own and lose your job you could have to sell at a massive loss (in the tens of thousands).

I see rent as dead money. I have rented in the past, and will rent again in the future, but it's still dead money.

You rent, loose your job, lets hope you have relatives or friends who can house you, or you become homeless.

You pay a mortgage, loose your job, and you can work out something with your bank. You can't, you have to sell... sure, you loose out on some money, but you'll gain a lot more money than the renter.

Sure, you'll loose out, but if you and Bob both pay €1,500 a month, you into a mortgage, him to someone as rent, after 15 years, you both loose your jobs. Bob is now homeless. You now have a few thousand from selling your house.

When I can, I'll buy a house. I'll make improvements to it, I'll change the wallpaper, and knock a few holes in it to make it more mine. Can't see it happening until I get paid a lot more, but it's something I plan to do. If the banks won't give your a mortgage, you have to rent. It may be dead money, but at least you can move to a different location if you don't like the neighbours

As one poster said: when you retire, you want to chillax the cacks.

Not keep paying someone else your retirement money till it runs out, and you become homeless.

sorella

Interesting "logic" in the last mail.

If your home is repossessed, you may acquire capital, but enough in today's market to buy a new house?

We are pensioners; enough to rent with so no danger of homelessness. If you are younger and lose your job? Are there not enough safe falls in Ireland to help with that?

Owning a house means maintenance of that also; it is the high cost of eg plumbers and electricians etc. Maybe you can do all that yourself; many cannot. We rest easier knowing that if, as happened a few months ago, the back boiler burst, all we need do is call the landlord.

Paying for that would have crippled us financially. Been there, done that. If in a winter gale, the there is bad damage, the same applies. It gives peace of mind.

Getting your hair cut is also in the terms you are thinking in "dead money"? It is a service we pay for. As is eating in a restaurant etc etc.

When we rent, we are paying for a roof over our heads, a place to sleep and call home.

That in these days is worth a great deal.

irish_bob

the_syco wrote: »

I see rent as dead money. I have rented in the past, and will rent again in the future, but it's still dead money.

You rent, loose your job, lets hope you have relatives or friends who can house you, or you become homeless.

You pay a mortgage, loose your job, and you can work out something with your bank. You can't, you have to sell... sure, you loose out on some money, but you'll gain a lot more money than the renter.

Sure, you'll loose out, but if you and Bob both pay €1,500 a month, you into a mortgage, him to someone as rent, after 15 years, you both loose your jobs. Bob is now homeless. You now have a few thousand from selling your house.

When I can, I'll buy a house. I'll make improvements to it, I'll change the wallpaper, and knock a few holes in it to make it more mine. Can't see it happening until I get paid a lot more, but it's something I plan to do. If the banks won't give your a mortgage, you have to rent. It may be dead money, but at least you can move to a different location if you don't like the neighbours

As one poster said: when you retire, you want to chillax the cacks.

Not keep paying someone else your retirement money till it runs out, and you become homeless.

the bank is not as resonable as you suggest should you run into trouble repaying your mortgage , even they sell your house , you can end up with a ****ty credit ratting which will follow you to the grave

im not idealogically in favour of renting over buying or vice versa but i believe that a person renting has more freedom and is not a slave to a financial institution

SkepticOne

I think the main reason people consider rent to be dead money is that they compare the full amount of a mortgage repayment with the same amount paid in rent. Naturally, the mortgage comes off better because some of the payment goes towards paying off the capital of the house. If it were the case that rents are equal to mortgage payments then, yes, all other things being equal, you should go for the mortgage.