Interesting post. Buying in

Michael Wolraich — Wed, 15 Oct 2008 21:44:00 +0000

In reply to How The American Dream helped create this American nightmare ....

Interesting post. Buying in New York has always seems especially problematic to me b/c of maintenance costs and taxes. Furthermore, during the last decade, apartment prices have outpaced rent increases to the point that if you buy a new apartment with say 20% down and then rent it out, you take a substantial loss, suggesting that housing prices are out of whack here.

But one point that your post misses. Over time, an owner's interest payments go down, whereas rents go up. After 30 years, you have the real estate asset and no costs mortgage costs. A renter who invested instead of buying may have more valuable stock assets, but he's still paying rent that has increased faster than inflation. Let's say I buy a studio for $300K which I could rent for $2K/mo. Let's go with the WSJ's estimate that buying a $300K place costs $1M over 30 years. In 30 years, if rents keep pace with the 8.6% annual real estate increase, you'll be paying $23K/mo, and you will have paid $3M in rent over the whole period. And of course after that, the mortgage is paid off, and the relative saving from buying continues to go up.

Another way to think about it is to treat the amount you save on rent as income. As a simple investment, stocks outpace real estate, and real estate has more costs. But even if you take a loss for the first few years, the "income" ultimately covers the costs plust the investment differential. You're essentially a residential real estate investor, but you get a big tax break and don't have pay management costs for tenants.

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Interesting post. Buying in