Rent vs Purchase: A Comparison

Also posted at Priced Out Forever.

Buy If You Must. Why Must You Buy?

by guest poster Eleua (with contributions and spreadsheets by Tim)

Click here to download the Excel Spreadsheet that the numbers below are based on.

I need to take a step back and insert a personal note. While I disagree with the motives and actions of the faceless Real Estate Industrial Complex (REIC), there are genuine, honest, intelligent and wonderful people that work as RE agents, mortgage planners, title agents, contractors, appraisers, granite counter fabs, etc. It might be difficult to find one of these in an sub-prime boiler-room, or on a CNBC interview, but there are those out there making a living that are just as much of a victim as their customers. Please separate my disdain for the high priests and the overall entity from the honest people that believe they are trying to help someone achieve a dream. Second, difference of opinion does not constitute condemnation. I enjoy a healthy, spirited, raucous discussion more than most. At the end of the day, drinks are on me.

With that said, let’s get on with the flogging.

I will be the first to say that buying is a good idea if you intend to live in the house for the bulk of the mortgage period, you can afford it, and it is viewed as your nest, rather than your nest egg. If you are a transient, or you are trying to save for retirement by living in your 401(k), you might get lucky and you might get ruined. Houses are homes. They should not be investments.

200-7! You Crapped Out.
For the past several years, we have been living in a speculative economy. During the late ’90s, this was manifested in stocks, and now it is takes the form of residential real estate. Everyone wants in on the fun. Why not? Real estate, like stocks, always goes up in value. It is a great investment, and the way for normal people to build wealth. At least that is what the Real Estate Industrial Complex (REIC) wants you to believe. They don’t make as much money if you are skeptical.

At first glance, it sure seems like a dynamite investment. Everyone has a grandmother that bought her $600,000 home back when it was $60,000, and if you live in California or Seattle, you can’t go 15 minutes without running into someone yammering on about how much their home has gone up in value. Some idiots treat a daily visit to Zillow like they would a call from their stockbroker.

By Your Lease, My Landlord
The new homeowners are buying into the idea that America does, in fact, have a class system: the Landed Class, and the Perpetual Renters. The Landed Class have unlocked the secret to passive wealth, and the Perpetual Renters are condemned to the outer darkness of blowing their savings on their landlord’s mortgage – a double insult.

All current living generations in America have been force-fed the idea that home ownership is absolutely essential to financial freedom. It is an article of faith in the national religion. Question this and you are branded a heretic. Somehow, through an Orwellian twisting of the language and a corruption of the educational system, debt became wealth. The last two generations that would have disputed this have passed on.

Morons + Money = Lumpeninvestoriat
The REIC sells homes as investments to the Lumpeninvestoriat. Homes are more expensive if the parties attach a high speculative premium. The higher the speculative premium that accompanies a property, the higher the price will be. This reinforces the validity of the speculation. Normally, this is called a bubble. The REIC makes a lot of money fomenting a bubble.

Is a home a good investment? If by investment you mean that it throws off the dividend of a place to call home, then yes. Renting provides the same benefit. If you are seeking a “forced savings program” and capital appreciation, you might be better off with payroll deduction and a quality, value oriented, contrarian investment portfolio.

Pay No Attention To The Details Behind The Curtain
Let’s examine a common exercise that many in the REIC like to conduct to shore up their position that your home is your nest egg.

A gracious local mortgage planner responded to my stunned disbelief that someone would refer to a mortgage as a “forced savings plan” by posting a comparison between a hypothetical renting scenario and buying the same house. This is her example that shows how a house can be a great savings plan.

Owning a home is not right for everyone. There are certain benefits to not owning the home you live in. If something goes wrong with the property, you simply ring up the landlord and they get to fix it. You pretty much know what your cost are going to be month to month (unless your landlord decides to sell the property, increase rent, convert the condo, etc.). On comments from last Friday’s post on interest rates, there is a discussion debating if one could consider having a mortgage as a forced savings plan. I know I’m going to seem biased since I am a Mortgage Planner…and I fully expect all of the number-crunching-junkies out there to have a heyday with what I’m about to post…but here goes!

I found two similar homes, both in the north Seattle area. The rental property is available for $1850 per month. The home for sale, with close square footage, rooms, area, etc., is available (actually, an offer is pending) for $499,995.

With the comparison, I’m going to assume someone has 20% down to either invest in the stock market or to buy a home. The current rate for a 30 year fixed is 5.75% (APR 5.904%). Principal and interest is $2,334 plus taxes and insurance equals a total payment of $2623. First year monthly tax benefits are $606 (mortgage interest benefit will decrease, property tax benefit will most likely increase).

The prospects are in the 28% tax bracket; they have a gross income of roughly $8000 per month and can have $700 in monthly debts with credit scores at 680 or better. The investor will receive 11% from the stock market and the homeowner will benefit from an appreciation of 7% on their real estate.

Rent at 5 years     Homeownership at 5 years
Total Payment $117,863 Total PITI $157,396
Principal Paid 0 Principal Paid $28,951
Tax Benefit 0 Tax Benefit $35,293
Net Cost $117,863 Net Cost $93,152
Real Estate Value 0 Real Estate Value $701,269
Loan Balance 0 Loan Balance $371,045
Total Home Equity 0 Total Home Equity $330,224
Rent at 10 years Homeownership at 10 years
Total Payment $254,498 Total PITI $314,792
Principal Paid 0 Principal Paid $67,519
Tax Benefit 0 Tax Benefit $67,893
Net Cost: $254,498 Net Cost: $179,381
Real Estate Value 0 Real Estate Value $938,566
Loan Balance 0 Loan Balance $332,477
Total Home Equity 0 Total Home Equity $651,089
Investment Investment
Opening Balance $109,000 Opening Balance 0
5 Yr Return @ 11% $188,452 5 Yr Return @11% 0
10 Yr Return @11% $325,817 10 Yr Return@11% 0
5 Year Net Worth $188,452 5 Year Net Worth $330,224
10 Year Net Worth $325,817 10 Year Net Worth $651,089

The first five years with the mortgage provide an average monthly principle reduction of $482.47 per month. Taking out any appreciation factors, the principle principal paid each month is a forced savings plan. With that said, home equity does not earn interest. And I would probably encourage most clients to consider not using the entire 20% for the down payment to stay more liquid (depending on their entire financial picture).

For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.

Let the games begin!

This is a very common proof put out by the REIC to keep the Lumps feeding from their trough. I’ve seen it in a dozen different forms. If it was posted on a billboard, and you drove past it at 70 mph, on a crowded freeway, it would make sense. Fortunately for the REIC, the flashbulb attention span, in combination with the economic and historical illiteracy of your average homebuyer makes this work.

Is This Apples-to-Apples, or Salmon to Mullet?
Using the provided example as the basis for comparison, we will take out our pencils, calculator, green eyeshade, and a case of Mountain Dew and hammer out a valid side-by-side look at renting vs. owning.

Rent is $1,850/mo. I guess if you show up looking like you just crawled out from a flophouse in Pioneer Square, you would pay full price. In this market, if you showed any semblance of responsibility and wanted to negotiate, you could knock 15% off that price. However, we will go with the $1,850 to keep as close as we can to “apples to apples.”

Our poor, pathetic loser renter is on the hook for $1,850/mo + 3% hikes per year. Over the first 5 years he lays $117,863 on the altar of his landlord’s good fortune. In 10 years it amounts to $254,498. This assumes that rent tracks at 3%, which with all the building and speculating in real estate is a pretty bold assumption.

Over the same time our budding noble is also shelling out money for his living situation. He paid $100,000 for the down payment, and (according to Rhonda) currently pays out $2,623/mo in principle / interest / taxes / insurance (PITI).

Up until now, I am in agreement with Rhonda. We now need to look deeper into the realities of home ownership to find the true value of each living situation.

Real Estate Always Goes Up – It’s In The Constitution
Perhaps the biggest flaw in the classic “Rent vs. Own” comparison, as put out by the REIC, comes in the form of assumed appreciation of the underlying asset. It is given as an absolute certainty that real estate always goes up. Yes, in the past few years that has been the case. Will it happen tomorrow? Nobody knows – nobody. To assume this is, at best, irresponsible. Capital appreciation is never assumed when assigning value to an investment. Capital appreciation may be estimated for speculative purposes, but not investment purposes.

I am not against speculation – I do it all the time. However, it is speculation; it not investing, just as meaningless sex is not love. There is a huge difference. It is very important not to have expectations of one when engaging in the other. Assigning a value based upon the dividend or benefit an asset provides is investing. Assigning a value based upon someone else’s view of the price is speculation.

It’s Clear Sailing In The Rear-View Mirror
I wonder how anyone in the REIC can so confidently forecast an appreciating market? How do we know the market will not shift into reverse? We don’t. Yes, we can guess, but we don’t know. I would submit that after the breathtaking run in real estate over the past few years, and the problems that we are facing in the mortgage finance space, a very strong argument can be made for a precipitous drop in real estate prices – even in Seattle.

If you run the appreciation at +7%, you would be well served to run it in reverse to give a range of expectations. Back in 2000, many stock bulls (especially those on Wall Street that profit from high priced stocks) believed in the “New Economy.” This New Economy was based upon the absolute fact that certain, high quality stocks will always go up in price. Microsoft, Yahoo, Intel, Cisco, Juniper, Qualcomm, eBay, Lucent, Corning, etc. were all touted as fail safes. Seven years later, these predictions look foolish and self-serving. Had speculators prepared for a significant rollback, the pain may have been alleviated to some degree. Going “all-in” at the wrong time is devastating.

Removing the miracle of perpetual appreciation, the 5 and 10-year numbers for owning would have to be reduced by $201K and $438K respectively. If we reduce the appreciation by the same amount as we assume it appreciates, the owner’s position is reduced further by $126K at 5 years, and $240K by 10.

This is a pretty wide differential for something we don’t know. A prudent analysis would be to not factor in any appreciation. Such was the example in Northern California from the late ’80s to the late ’90s.

Show Me The Money! – Well…Let’s Hold Off On That.
In addition to the folly of just assuming that an asset will appreciate, it is incumbent upon the buyer to understand why an asset appreciates. Home prices track incomes as well as the ability to find easy money. Without easy money, homes could not appreciate beyond what incomes could support. A house is not a bank account that accrues compounding interest.

Unfortunately for our prospective homebuyer, both sources of rising home prices are under attack. Mortgage lending has been a festival of economic irresponsibility since 2003. Up until early 2007, anyone could qualify for just about any amount of money with absolutely no documentation or lender vetting. The finance industry made billions selling high fee mortgages and chopping them up for sale in the secondary markets. It was a fundamental blunder to build a business model (or an entire industry for that matter) on lending money to questionable borrowers with lousy collateral. That business is now disintegrating right before our eyes. Lending standards will be increasing dramatically (driven by both government and investors), and rates will certainly rise. The go-go days of insane lending are in the rear-view mirror.

Global wage arbitrage with Mexico, India, China, Russia, and Brazil are keeping a tight lid on incomes. Incomes have been stagnant over the entire duration of the housing bubble, and show no sign of any broad-based increase. Other considerations include rising taxes to pay for the increasing scope of government, immigration pressures, and the retirement of 77 million Mouseketeers.

Comparing With Four Hands Tied Behind Your Back
While Rhonda was generous with her assumptions of the ROI of the renter’s investment portfolio, I wonder why this investment wasn’t treated in the same manner as the appreciation on the house? Why can’t the investment portfolio also include 4:1 leverage? Why assume 11%? If we are in the business of forecasting good things by looking in the rear view mirror, why not use a real example from another investment that took place over the same time period as the latest housing bubble? A 4:1 leveraged investment on silver bullion would have returned $1,120,000 on a one-time buy-in of $100,000 over the past 7 years.

Tax Benefits Need A Tummy Tuck
The tax benefit is overstated. Yes, itemizing mortgage interest and property taxes is a great benefit. If you make $96K/yr, you can do quite well come tax time. The problem comes with the “standard deduction,” which is the tax deduction that you get without itemizing. The standard deduction is less for a single man, than it is for a family. Rhonda assigns $35,293 of tax benefit for 5 years and $67,893 for 10. If we correct for the standard deduction for a family, that tax benefit is reduced to $20,873 and $39,053.

Oops, Your PITI is Slipping
The PITI was probably too low. $288/mo for taxes and insurance is probably more like $550. Tax rates are considerably above ½%.

It is doubtful that the county would keep property taxes stable. Even in a period of decreasing values, it is very easy for local governments to keep their bloated budgets going on the backs of the local citizenry. Even if you assume the tax rate holds steady, if your property is increasing in value, so is your property’s government-assessed value, right? 5 to 10 % property tax increases are certainly well within normal assessments. Let’s say the assessment increases at the same rate as the assumed appreciation, but with a 5-year lag.

So, What Are You Doing This Saturday?
Houses are also maintenance intensive. Rhonda assumed that our homeowner never needed to repair his castle, nor make a visit to Home Depot. If the homeowner spends 1% of the value of his home on maintenance and improvements (what’s a trendy Seattle home without granite, stainless, and bamboo?), we need to add another $400/mo to the equation.

The Highest Fee Brokerage
Finally, the REIC never likes to bring up that a hefty fee exists for cashing out of the home ownership money machine. You need to pay them a minimum of 7% of the gross sale to get at all that wonderful equity. Assuming the home price remained constant, that is another $35,000 out of the piggy bank.

The Bottom Line
Now that we have a more complete picture of the situation, let’s take a look at the financial bottom line for rent vs. purchase in few possible scenarios. We’ll use Rhonda’s given purchase price, down payment, investment return (11%), and rental price, varying only the assumed appreciation in each case. “Home Value” refers to the total amount of money you pocket upon the sale of the house (since that is the only way you can get the money).

7% Rent Purchase
Appreciation Investment Value Home Value Difference Advantage
@ 5 years: $224,343 $275,668 18.6% Purchasing
@ 10 years: $402,613 $574,573 29.9% Purchasing
@ 25 years: $1,662,659 $1,815,340 20.3% Purchasing
4% Rent Purchase
Appreciation Investment Value Home Value Difference Advantage
@ 5 years: $224,343 $189,950 18.1% Renting
@ 10 years: $399,918 $350,060 14.2% Renting
@ 25 years: $1,565,654 $1,030,024 52.0% Renting
0% Rent Purchase
Appreciation Investment Value Home Value Difference Advantage
@ 5 years: $224,343 $90,051 149.1% Renting
@ 10 years: $396,625 $128,619 208.4% Renting
@ 25 years: $2,172,580 $461,100 371.2% Renting
-2% Rent Purchase
Appreciation Investment Value Home Value Difference Advantage
@ 5 years: $227,271 $45,749 396.8% Renting
@ 10 years: $399,452 $44,272 802.3% Renting
@ 25 years: $1,454,580 $156,786 827.7% Renting

The Million-Dollar Taffy Pull
So, did we answer the question of it being better to rent versus own? Not really. It is all based upon how congruent your assumptions about the future are with the reality. Nobody knows what will happen next week, much less 10 years from now. I would say that wildly optimistic assumptions of owning compared to a watered down forecast of the economic flexibilities of renting is not a valid comparison.

People always forget that using borrowed money for investing (whether it is a brokerage margin account or a mortgage) is leverage. Leverage works both ways. It amplifies your success or failures. What turns 4 walls and a roof into the American Dream is the same mechanism that makes it your financial coffin.

Yes, if you get enough appreciation of a home’s value, it makes sense to buy. This is true on any investment. However, if the home stagnates in value, or falls, the damage is magnified by the mortgage, taxes, and illiquidity.

Home ownership brings certain benefits like some level of sovereignty over the use of the property and any ephemeral value from “pride of ownership.” It also brings other pitfalls, such as illiquidity, maintenance, acts-of-God, or even your overweight, aging hippie neighbors that insist on walking around naked as they oscillate between the hot tub and the “herb” garden.

Renters may need more than just the consultation of a sledgehammer and a case of Mickey’s Big Mouth to knock out a wall, but if a heavy-metal band moves into the house next door, they can give notice, pull up stakes and move into a nicer home. If a renter gets transferred, they don’t have to put up with the agonizing process of selling a home in a squishy market, and then paying 7%+ to the REIC. At worst, they lose their deposit and move on.

Lending While Intoxicated
As the mortgage finance industry scraped the bottom of the barrel to find new suckers buyers to put into homes, they swerved head-on into the world of the financially illiterate. Many of these buyers did not have sufficient savings to pay the standard first/last/deposit as required for most rental contracts. Many did not have sufficient income to qualify to rent, yet the finance industry was able to qualify them for a home. This was done under the pretense of getting them into a beneficial financial situation. Rhonda summed it up as follows:

“For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.”

Yes, I guess you can refer to the principal paydown on a house as a “forced savings plan.” It is true that most Americans do not have any form of savings, other than their aging Beanie Baby collections, so I guess this is better than nothing. It also presupposes that most Americans are idiots. With that, I agree, but would like to add that allowing an idiot to juggle a half-million dollar, highly leveraged, speculative savings plan is a recipe for an unmitigated disaster in their personal life. Set this against the backdrop of tens of millions of the very same, and you have the certainty of a national financial disembowelment.

Given the recent activity in the sub-prime mortgage finance companies, this hypothetical is now a reality.

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  1. 1
    Matthew says:

    Bravo! Bravo!

  2. 2
    T,V & Mr.B says:

    wow! I’m gonna show this to my wife. We might become lifelong renters. he, he!

  3. 3
    redmondjp says:


    A well-reasoned, objective, even-handed and thorough discussion of the topic that both bubble-believers AND perma-bulls should be able to understand.

    Required reading for anybody visiting this site.

  4. 4
    EconE says:


  5. 5
    Terry says:

    Wow! Hey Eleua, don’t hold back. Tell us how you REALLY feel!

    Great post!

  6. 6
    meshugy says:

    Yes, if you get enough appreciation of a home’s value, it makes sense to buy.

    Exactly….Feb. MLS shows King County appreciation at 14% YOY….that’s double what this article states as the min. appreciation required for buying to be better then renting.

    Tim, thanks for pointing out so clearly why the smart $ has been on buying.

  7. 7
    Deejayoh says:

    yes! Ask the Shugster. It’s 14% today and always will be!

    Forget history. We are on new plateau! Never mind that after about 5 years of 14% home price appreciation vs. 2% income increases there will be 5 people left in the country that can buy a house… Shuggy is rich!

  8. 8
    WTF says:

    Nice work on this piece. I’ll have to re-read it a few times for it to all sink in…

  9. 9
    flotown says:

    I don’t think you are appropriately accounting for risk adjusted returns. while the stock market is typically higher its also typically risker than residential real estate. If you were to incorporate different discount rates for investment versus home sale proceeds you might capture that better

  10. 10
    Christina says:

    Very amusing spreadsheet. I plugged in my homeowner numbers and can come out ahead of the renters this year, in my ninth year of homeownership, at 4.0% appreciation (and 3.0% inflation rate). I can’t say the same for the people I know who bought within the past two years however, even those who traded up and had 20% downpayments…

  11. 11
    darth_s says:

    7% appreciation is totally BS. I bought my house in King County in 94 and sold it in 2000, at the height of the stock market – and my rate of return was about 4%, not including all the repairs and upgrade I put in. The actual return rate was closer to 3.5%. The owner before me, had it from 87 to 94, also made about 3.5% return.
    Fast forward, just look at the Bennett homes at the Enclave, Sonohomish. They built 18 houses in this development. The first one was sold around May, 05. The last one was sold in Feb, 07. They had pretty much the same list price during the whole time. So, the first buyer over there has almost 0% appreciation (!) during the whole time. Actually, they would come out as a big loser if they must sell for whatever reason.

    Another one, look at this home on Zillow: 763 Vashon Pl NE WA 98059. This empty house has been on the market for one year, and yet somehow the DOM was never shown above 90 days. It is currently asked for 550K, the SAME price as last year!

    And yet these are anecdotes during a banner year. Wait until the wave comes…

    No wonder why study after study shows that over the long term, housing appreciation is just about inflation, give or take a few points depending on location/timing.

  12. 12
    dave says:

    I wonder if you could incorporate rental income you would get if you bought a multi-family property. The spreadsheet definitely shows that I’m better off renting than buying a property that doesn’t generate income. But I’m looking at maybe buying a multi-family property and living in one unit while renting out the rest. Would the result still hold true?

  13. 13
    Rhonda says:

    Very well done. You have many great points.

    First, I should apologize for using the tax info from the listing. It must have been an error on the Realtors part or perhaps the property is receiving a senior discount…regardless, it’s not an accurate figure. I typically use 1.25% of the sales price to estimate taxes for potential buyers. That would increase the tax benefit to the home buyer shown in my example.

    Q: Are you factoring in the equity the home owner is receiving from their monthly mortgage payments (gasp–savings plan)? Or is this just based off of appreciation?

    I would also disagree with 7% agent brokerage fee…that is just as negotiable as the rent.

    Lending while intoxicated…IMHO it’s not so much the lending industy who has scraped the bottom of barrel…more so it is Wall Street greed making huge returns off of risky loans. Yes, there are predatory loan originators…you’ll see them now advertising to get people out of their long term fix period ARMs smelling a chance to have a refi boom. I’m not that LO.

    Also, I’m not sure why Ameican’s don’t save. I really enjoy reading how much the “bubble bloggers” save…honestly, before blogging, I have not met a lot of so-called savers. I see more bank statements and credit reports full of CRAP. So if a person can be “responsible” (key word)with having a mortgage…and now they think about “the American Dream” instead investing in more “beanie babies” or what ever floats (sinks) their boat, then it’s beneficial and it is a savings plan.
    Before you bite my head off, I’m sure this does not apply to you. I’m totally speaking from what I see when I have to roll up my sleeves and go to work in the morning.

    I guess my last question I’d like to ask…(since I’ve gone through the steps to create a eblogger account just to post this comment)…your information on saving money is great…why don’t more people do that?

  14. 14
    wreckingbull says:

    Excellent work Eleua.

    I would also like to say that Rhonda, you are a class act. I think both you and E are correct about the intoxicated parties in this mess. Mr. Greenspan has been the bartender. Now it is time for the hangover.

    Baby Shug, your contributions to this blog are absolutely priceless. I hope they never stop, just like your 14%.

  15. 15
    WatchingFromTokyo says:

    Thing of beauty, Eleua!

  16. 16
    S Crow says:

    I would disagree with the 7% as well Eleua, it’s usually higher, factoring all traditional seller related transactional closing costs–not including seller paid contributions or credits for roofs,work orders,repairs, etc.. which would make it even higher.

    For example: Excise tax is 1.78% of the sales price in most municipalities, 6% brokerage fees, title insurance, escrow fees, recording fees, reconveyance fees etc…it all adds up.

  17. 17
    The Tim says:


    To answer your question, the “home value” figures in the post are the sum of [appreciation] + [principal paid] + [down payment] – [capital gains tax (where applicable)] – [RE sales fees] – [excise tax].

    So yes, the portion of the monthly mortgage payments that paid down principal is factored in.

  18. 18
    The Tim says:


    For the spreadsheet and the tables at the end, 6% RE fees + 1.78% Excise tax was used. If there are additional fees on the seller associated with closing, those were not factored in.

    You could however download the spreadsheet and adjust the “Sales Fees” figure to higher than 6%.

  19. 19
    Rhonda says:

    The excise tax is deductible…when I sold my last house I wanted to croak over what I paid…regardless. S Crow, do you constantly see 6% commissions? I was under the impression that varied.

    Wreckingbull…thanks so much! I was bit relunctant to do the post…because the numbers can be toyed with from either side. And it has to be near impossible to create something that would factor possible apprecation/depreciation with homes and gains/losses of investments in the FUTURE…not to mention all of the “what if” this cost and factor in “that cost”…there are many variables. I did try to be fair to both sides and I did use an actual rental property and listing of similary values/qualities.

    We’re all making our best, hopefully educated, guesses. If someone creates a guaranteed crystal ball…please let me know!

  20. 20
    Rhonda says:

    Tim, you thought of everything!

  21. 21
    S Crow says:

    The Tim,
    I was trying to get a laugh, but evidently failed. :) My dry humor needs much work. Much.

    Rhonda, you crack me up. Yes, I do see the 6% the majority of the time, but not 100% of the time.

    Sellers listing their home typically do not budget for commission variations like 3.5/1.75 or 2.5 or 3.0/1.5 or 1.0–unless it is a very high end home. They budget for 6% straight. That number is in their brains to work from(the industry has done a good job of making it stick.)

    The last home I sold in Edmonds I asked the listing agents we interviewed from Windermere, JLS, CBB and MacPherson’s if the commission was negotiable. All said yes–with the proverbial, weeelllll technically speaking, yes. I asked if they would sell the house for less than 6%. All said no.

  22. 22
    Eleua says:


    I’m not shocked that when you peek into someone’s finances, you see next to no savings. This is another reason that the impending credit bust/recession is going to be a real bitter pill for people and the nation as a whole.

    Nobody has any reserves.

    Here is an anecdote from me that many on SB have already heard:

    Back in the day, I was the first stop a young enlisted man’s trip to the Commanding Officer’s office for a letter of indebtedness. It was usually related to the financing of a used car. If you go to just about any Navy town, you will find the worst elements of humanity all trying to put young military members into automobiles they can not afford. The salesmen know they can go to the service member’s commander and put additional pressure in that manner.

    In Bremerton, I had some saleman think I was some country bumpkin looking for a car. He tried to finance a used Jeep at 38% interest. I’m not making that up. When I called him on it, and asked to speak to his manager, he disappeared in the back and didn’t come back out until I left the property.

    When I was in my squadron, we had 78 officers at one point. 3 were making payments on a house.

    Fast forward ten years…

    Now, every mid-level enlisted man up through the Admiral is now buying real estate in Kitsap. These people transfer out quite often.

    I know for a FACT that their homes do not cash-flow when they rent them out. Once this market turns on its head, there will be LOIs flying all over the place.

    One of the quickest way for a service member, especially an officer, to lose his security clearance is to get into too much debt.

    Can you imagine being the Weapons Officer on a Trident sub and losing your security clearance?

    Same story…different financial trap…same ending…

    Come back and see us. It was fun blogging with you.


  23. 23
    Tony1790 says:


    I’m the CPO that sold off all of my Kitsap properties….NONE were cash flowing (I had 12 houses). Anyway, my last home (personal residence) has been in limbo 3 weeks after the closing date was to have been. Reason is the lenders are canceling loan programs left and right with no notice. My buyer is an appraiser that did the appraisal on my last rental. She is on her 3rd lender, the first 2 canceled their programs.

    Ready seller + ready buyer – lender crunch = no sale

    I’m praying to God that this closes, I bought a used RV that I’ll be living in for a while until I find a good job. I haven’t found one yet, I am NOT commuting to Seattle again, I don’t care how much the salary is!

    Currently I believe I will leave this wretchedly over price state for greener pastures.

    Take care. Wish me luck in becoming a “new” renter.

    Tony in Port Orchard

  24. 24
    Eleua says:


    I’m sorry to hear that you are getting pinched by the new lending standards. Hopefully, someone will fund this and you can get out.

    Glad to hear you sold off your other properties. Hopefully, that was at a tidy profit.

    I know what I saw when I was in the Navy, but did you see any of the same thing? My buddies in other squadrons all had the same stories to tell, so my guess is you did.

    I think Kitsap is going to get gutted. There is no way that Silverdale can support those prices. Poulsbo, Bremerton, and Port Orchard are not any better.

    It is nice to hear someone that has a mostly happy ending.

    LT E

  25. 25
    scott says:

    A great real estate calculator that includes reant-vs-own calculations is RealtyJuggler Calculator. It runs on SmartPhones and PDA’s from Palm as well as Windows Mobile / Pocket PC. The calculator includes a tremendous level of detail including computing tax benefits of owning, returns you would get in the stock market if you rented and didn’t pay a down payment, PMI / insurance / tax costs, transaction cost for buying and selling a home and much more. The way the software works is that you fill in the blanks to some basic questions and a plain english explanation comes out explaining the financial situation of renting compared with buying. It’s extremely easy to use and built in a way where you can tweak the settings to determine where it would make sense to rent and where it would make sense to buy as well as give you straight honest answers to specific scenerios.

    This is a real must have product for potetial home owners, especially in the current market climate.

    You can download a 30 day free trial from the company web site. the product costs $9.

  26. 26
  27. 27
    Old Dog says:

    Wow. this is a cool site. I was wondering about rent vs buy and if I could find a rental. but I guess there is a lot more to think about. I heard that one time in Seattle in the late 1980’s you could buy a very nice place for $90,000 bucks but now that same place is over $500,000. Wait a minute. I thought buying was a bad idea. oh buying now is a bad idea. now I get it. so when will home prices be what they were in the late 80’s? not likely huh? so now after reading about all of this whereas and wherefor in the examples above I’m still confused. Isn’t there some place where one can get information on the best time to buy a home? All of the info on your site seems to make you that source but you are saying to wait. so if I wait, will you tell me when to buy? in the meantime I hope I can find that rental for $1850 somewhere as everyplace I have been looking the competition is pretty intense-likely all the people who read your blog and are deciding to become or stay renters. guess there are no easy answers. take a look in your crystal ball and let me know when to buy….Thanks…

  28. 28
    Eleua says:

    I don’t really think you need a “crystal ball” to help you decide if it is a good time to rent or buy. A modest grasp of recent history should be good enough for most people.

    People tend to think of their homes as “their biggest investment” when it comes time to justify spending 40% or even 60% of their gross income on a home. They look back at home appreciation and view it as a “can’t lose” endeavor. When called on the foolishness of reaching beyond their grasp, they shift to how a home is a place to live, and they “have to live somewhere.”

    Which is it?

    If it is an investment, then treat it as such. The difference between a good home and a good investment is the price you paid for it. If you are paying peak prices at the end of an unprecedented runup in home appreciation, then you might want to look at other “investments” that were purchased “at the peak.” Look back to the stock market action in ’00-02 and see how they performed.

    The NAZ 100 (Big Cap Tech) was the “Seattle” of equity asset classes. As asset class after asset class lost value, people piled into the “safety” of the NAZ 100. Obviously, they “had to buy something” so they went for what was hot, or “special”, and never stopped to consider how they might be the last car in a massive 18 car pile-up.

    I don’t know about you, but if I am watching my peers get clubbed, I’m likely to think that I am next, rather than immune. Call me a pessimist.

    Look at SFH cap rates. Look at SFH rents. Look at the negative cash flow for landlords on SFH properties. Look at every other market in the country. Look at past bubbles and how they ended. Look at the finance mechanism for residential real estate (the banks are getting disemboweled on MBS issues). Look at the inventory and sales rates. Look at the foreclosures.

    If you are buying a house for the purposes of living, then buy. You might want to rent and save a significant amount of money, but if you can’t look yourself in the mirror, then spend the extra 150% and buy. Just don’t be surprised to find that you owe a lot more than you have in equity and that your “biggest investment” is an illiquid, insolvent, expensive millstone that will hang around your neck.

    Seattle isn’t special – just stupid and arrogant.

  29. 29
    Amy says:

    Many people are asking why the government isn’t doing more to bail out homeowners.

    The government has already instituted a plan to let people walk away from their homes without claiming any loss as additional income. This could be the fresh start that people need. The Mortgage Debt Relief Act of 2007 provides for this.

    Previously, if a bank sold a foreclosed home for less than the mortgage balance, i.e. a short sale, then the borrower had to pay tax on the difference as if it were income. Now that is not the case.

    This puts the problem on the banks, who made the loans in the first place.

    The banks will of course, write off the losses, which means that the government is paying for it in the form of lost tax revenues already.

  30. 30
    nbc says:

    Amy @29 — “the government is paying for it in the form of lost tax revenues already” You’ve got to be joking? That’s like saying that when I lose my job, the local coffeeshop is paying for it, because I’m buying fewer lattes. Does not compute.

  31. 31
  32. 32
    Eleua says:

    On March 21, 2007, “Meshugy” said:

    Exactly….Feb. MLS shows King County appreciation at 14% YOY….that’s double what this article states as the min. appreciation required for buying to be better then renting.

    Tim, thanks for pointing out so clearly why the smart $ has been on buying.

    My, oh my…how things have changed in 18 months.

    I miss ‘Shug. Those were good times.

  33. 33
    Matthew says:

    Wow that was a trip down memory lane… I wonder where the Shuginator is right now.

  34. 34

    […] not going to go over exactly how all the values below were calculated, since it has been covered extensively before. If you would like to follow along at home, feel free to download my spreadsheet that will […]

  35. 35

    […] years ago I published a rent vs. purchase spreadsheet that takes into account interest rates, home appreciation, maintenance costs, insurance, income tax […]

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