Buying vs. Renting: A Capital Tale

I have my roots in an unshakeable market so I am invincible. Buy me! I am a no-brainer!

I have my roots in an unshakable market so I am invincible. Buy me! I am a no-brainer!

This post took 10 years in the making.  It has its origins in 2005 when I moved to the Washington DC area during the peak of the real estate bubble.  Soon after, I have been recommended, advised, urged and sometimes even warned about my foolish decision to rent.

The Peak

Mr. and Mrs. TFR rented an older, but renovated and spacious (1200+ sq.ft.), 2 bedroom 2 bath townhome for $1200 per month in 2005.  I was elated by what a deal I got when similar places were going for $1600+ rent in most places along the DC Metro line. With just a 45 min. commute to my workplace, it is not easy to do a whole lot better in the DC metro area.  In 2005, it was also available for sale at that time and the owner was willing to ‘sacrifice’ it to me for a mere $330,000.  I said, no thank you!   Since the owner was in a sacrificial mood, I figured that at a rental yield of just 4.4% (1200×12/330,000) when I was making an 8% average return on my financial investments,  my renting it will be the true ‘sacrifice’ of the owner! 

Soon after my rental decision, my wife and I were subjected to the ‘Joneses’ effect by many of our well-meaning friends and colleagues. We were told that buying a home in the DC metro area (DC, Southern MD, Northern VA) is a ‘no lose’ proposition.  Very low unemployment, plenty of high-paying professional jobs, and above all, the security of a stable and expanding federal government in the national capital will ensure real estate will always be in demand in DC. It appeared to be a compelling argument but boy, are we glad we did not succumb to it. When the market started to flatten out in 2006, our friends again warned that by continuing to rent, I was passing up on a ‘rare’ to a ‘once in a lifetime’ opportunity to buy DC area real estate at ‘bargain’ prices.

After the birth of TFR Jr., we moved to a bigger place in mid-2006, also on rent, mainly because the owner of the previous house pressured us to buy it for a special price of $300,000.  When asked why she reduced the price by $30K, she said she loved having us as renters who were always prompt and kept the place really well.  She repeated $300K was a ‘bargain’ for her place and we were foolish to pass up. 

The Fall 

From early 2008, the cracks were evident even in the ‘unshakable’ metropolitan DC real estate market.  By end of that year, the bottom fell out.   In 2009, there were no buyers and the owners continually dropped prices, but no takers.  Many of our friends who bought over-priced town homes and single family homes in 2004-2005 period, were sitting on zero equity or even underwater mortgages.  Once you figure in all the costs of selling, many of them were in the red. Of course, they are not selling, but there is one change the sobering market reality has brought to them. All stopped advising us about buying a home. They are busy worrying about their own home values. Some were silently wondering if their jobs will remain stable enough to ride out the downturn.   Mind you, these are people with stellar credit histories and stable, professional employment earning around six figure incomes.  You can imagine the plight of others.  

The Recovery

Despite the improvement of home prices and the relative strength of the DC metro region since 2011, the single family homes recovered far better than the crowded townhouse and condo market.   The ‘Houdini act’ pulled by many buyers (what else will you call it when sellers frequently complain “where are the buyers?”) showed the unravelling of the ‘invincible’ DC real estate market even during the broader market recovery.

The End (a decade later)

The homeowner continued to struggle with it and rented it out again in 2010.  I heard she lost her job few years ago (unfortunately) and couldn’t keep up with the difference between rent and mortgage.   Few months ago, I saw on the county records the house was foreclosed in early 2016 at $210,000 (36% decline from the peak)!  I remembered that she told me she had bought it for $240,000 in 2004.   With sales commissions, taxes and other maintenance costs (including nice interior renovation she did when we moved in) over the years, what a disaster this ‘no lose’ investment in the nation’s capital has been.

I am not against owning your own home but my advice to owners: Understand what a home mainly is, a place to live.  Enjoy the benefits of owning a nice place to live, but don’t buy into the press that your home is an investment that will always payoff.  Most of all, don’t advise renters to buy just because you did.  Whether I rent or buy or whether my home is 1200 sq. ft. or 5000 sq. ft, it doesn’t change who I am.  You don’t see your renter friends advising you to sell your home during market peaks.   In a future post, I will write about the biggest benefit of renting while working – it’s not the opportunity cost of locking your down payment in a house instead of an S&P 500 index fund, while that is a good enough reason to rent.

Are you a renter or an owner?  Is your experience different and if so, please share.

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12 comments on “Buying vs. Renting: A Capital Tale”

  1. By Jacq

    I have a friend who rents in a house, and her rent price is stable, utilities wrapped in, etc. I was renting in an apartment complex, responsible for my own utilities and rent going up every year. I do not get the mythical 3% raise every year, so at some point the rent increase was going to eat into my savings. I’ve also spent most of my career so far with a 1 foot out the door feeling and working in a high turn over industry plus renting, I wanted some stability.
    With a new job, it is closer to the metro and an apartment there would have been 300-500 more per month, yikes!
    My first question to the realtor was do people rent the condos here, and the answer was yes. That gives me peace of mind if the job situation changes, I don’t have to sell immediately.
    It’s not perfect and I’d like to design my own house some day with rooms that make sense and energy efficient, green materials in mind. I’d also like a lower cost of living area, which may mean remote work, so I’m working to gain experience with the future possibility of consulting or FI. 🙂

    • By TFR

      Thanks Jacq. Your points make you a perfect case for being a renter, which will get you to FI faster if you capitalize on career mobility, a key advantage of renting.

    • By TFR

      Scott, This has always been true and this recovery is no different. Gentrifying neighborhoods always recover prices faster than static or declining neighborhoods. The condo in my article is right on the bus line and just 2 miles from the nearest metro. Thanks for your comment and sharing the WP article. It makes the same point with good data.

  2. By FIRECracker

    Awesome post! Good for you for sticking to your guns and not buying into the cult. I feel terrible for that poor home owner who lost her job though 🙁 It’s so easy to get caught up with the buying frenzy when real-estate values are rising, but when it come back down it hits people HARD. I think this is why Americans are more aware of the downturns in the housing market than Canadians. All of my friends have never felt what it’s like for their home to drop in value and you’d think looking at our American neighbours, they’d learn a valuable lesson. Nope. Thanks for sharing your story!

    • By TFR

      Thanks FIRECracker. Last time I was in Toronto was 2 years ago, and even at that time, I found that most Canadians there saw their houses as the sure ticket to financial freedom. I remember thinking this bubble will also burst one day, but from your post it appears it hasn’t yet.

  3. By Tamara

    Interesting article, good quick summary of the cost analysis of ownership. Another use for the 4% rule of thumb.

    Using such an analysis treats the house as an investment rather than the asset it is. I have uses the same analysis in making the decision of whether to buy a new car or invest that money. so I agree this should be part of the equation in making the decision.

    . In our high Col area house prices have been recovered for a while and the old bubble high is now the median norm. We all need to live somewhere. Our home ownership costs are less than rental costs and will continue to improve….add in the security aspects…no rent increase etc it’s an easy decision. Ownership is better. For us.

    Cheers

    • By TFR

      Thanks for your comment Tamara. If it makes financial sense for you, then great. We just need to do the analysis before going headlong into a life-altering investment decision like buying a house.

  4. By ZJ Thorne

    I’m currently a renter, because I’m in a similar high COL market. The down payments alone would wipe out so many years of savings. I’d rather they earn returns on my investment and not get sucked into a house. I also like that the roof is the landlord’s problem. There is so much that I do not worry about.

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