Reasons why you might consider Rent-to-Own right ...

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3) NAR/Realtor (tm) propaganda is quoted by the mainstream press as economic truth. You've been tricked.

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Jon Selin, "jonselin"
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OK - The NAR economic projections were wrong last year, but so were a good number of other economists. Now many economists project things will pick up before the end of 2009. I hope they're correct, but I confess I am skeptical it'll be that soon. Hopefully I'm wrong.
But -
I am pretty convinced we will see significant inflation (due to all of the new spending, incentives, bailouts, etc) - and probably a slow recovery. The BIG question is - what can YOU do to best guard against the inflation?
There are 2 elements needed for the average person to ride out inflation or even benefit from it. Look at past inflationary cycles such as the stagflation of the 70s: Those who rented came out worst, those who owned a paid off home gained equity, but ironically - those who bought a home with a fixed rate mortgage gained equity - and think about this: They had their debt partially 'forgiven' by inflation.
So, the 'value' of the debt went down eventually while their equity went up, and secondly - as wages increased - the percentage of income needed to make their payments decreased - making their housing cost more affordable every month - allowing them to more easily afford the increased cost of other goods.
Another factor in this is that the government primarily uses increased interest rates to try to reel in inflation. That will make it less affordable for those who choose to wait - and probably by a far larger margin than they would 'save' by waiting for home prices to fall further.
Yes, yes, you might get another 5% or 10% off the price by perfectly timing the 'bottom'. But if rates went from 5.0% to say, 7.0% - your interest cost just went up by 40%. Follow? (5.0 to 5.5% is a 10% increase in your rate, etc)
So, renting might be fine for some - especially if they're sitting on enough cash to buy a home outright - go ahead&wait till you think you have found the bottom of your market (if it isn't already there).
If not - consider the bargain prices AND rates available now.
Example: You buy today at 5.0% $200k, your total interest cost over the 30 years is about $187k. You buy in six months at 7.0% at $190k, your total interst cost is about $265k, a total loss of $68,000. ($78k extra interest - $10k savings on the house) You'd enjoy lower payments the whole time too buying now. Which would you choose?

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Jon Selin, "jonselin"
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Of course, there are markets where there are huge disparities between the cost of renting&owning - you have to factor that in. In some markets, rents are lower than it would cost to own. Other markets actually have the situation where owning is cheaper than renting - how is that anything other than a no-brainer? I'd buy! You've got to live somewhere.
But wait - Even if the rents are cheaper than a mortgage payment... ask yourself: How long will that last? What if inflation makes your rents go up by 5% per year for the next 10 years? What if you could have been in a fixed rate mortgage during that time... saving money every month once the disparity flips - AND gaining equity when real estate begins to track with inflation (which may lag behind it, but eventually it goes with it).

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I believe there good reason to expect inflation in the future -- but it doesn't follow that buying a house is the best way to protect yourself from it.

As an investment, it seems like a very risky proposition. It's not diversified. It's illiquid. And it's a huge, single decision.

The low interest rates don't signal that it's time to buy, but the opposite. House values will drop again when interest rates go up, and incentives are withdrawn. Buy now, and you're buying into a propped-up market.

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"What if inflation makes your rents go up by 5% per year for the next 10 years? "

What if a gut of vacant properties makes rents fall? What if house prices fall even faster than rents?

You're painting a specific scenario, designed to make buying look like the smart move. It's an old salesman trick; I just got done watching some HGTV program where a Realtor was using the same lines to make a sale -- in 2006.

If your rent goes up, you can move. If your house value drops 15%- 20% in value, you're scr3w3d.

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Jon Selin, "jonselin"
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Of course buying is a risk. If you are that risk adverse, perhaps you should not buy. If I expected deflation to continue on&on, and/or interest rates to be so phenomenal, or thought prices were still way too high (which they might be in your market) - then I'd say rent. You seem to agree that inflation is on the way. So -
To make a simple illustration, let's look at a market where the rent or buy cost is the same, say $1000/month.
If inflation is 5% per year, in 10 years - your rent is now $1,551/month - my mortgage is still $1,000.
Wages eventually follow inflation, the market eventually follows wages because more people are able to afford homes. Yes, real estate prices can lag, or - they can follow inflation closely. But if wages go up by 55% like your rent did, of course real estate prices follow - whether sooner or later.
Oh - Now, since both of our wages went up - what if I decide to use my 'savings' on not paying the extra rent cost you'd have to pay - toward my mortgage balance?

Fast forward a number of years more, and I have a paid-off & (usually) appreciating asset, you have rents of what?.. $2,000? $2,500? per month for the rest of your life?? And $0 equity! Yeah, I don't know... that's the one that seems riskier to me. But then I'm an agent, so perhaps I am just evil & fooling everyone, right?

Hmm. I hope you somehow saved a ton of cash to pay your rent in retirement! That'll be relaxing...

I'll take that undiversified, risky, illiquid investment - thank you. If you'd like to lease one of my cash-flowing rental units, please send me your application! Oh wait, they're full. Sorry! : )

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You didn't even bother to mention the likelihood of short-term depreciation of that newly-bought house - a 10%, 15%, 20% hole that you'll need to climb out of before you can begin your path to riches.

The patient renter in my scenario has preserved his down-payment money, and maybe earned some interest on it, just not buying at the wrong time.

"Hmm. I hope you somehow saved a ton of cash to pay your rent in retirement! "
Thanks for your concern. Actually I have the cash to buy my next residence outright, anytime I choose, and I will retain a good amount to add to the retirement fun.

I helped put myself in this position by consistently ignoring salesmen.

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Roberto Ribas, "azrob"
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rent was equal to buy in many Detroit neighborhoods. Nevertheless, prices went to near zero, as did rents...

rent = buy is one factor, but you need some certainty that rent isn't going down with the local economy!

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Jon Selin, "jonselin"
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Wow, good thing you caught HGTV! Hey - Did you catch the 1970s?

Yeah, I'm laying out a scenario. But take a glance at the headlines&you'll notice that probably the only place that economists concur is in regards to inflation. Exactly how much & when? No one knows. What to do if you believe it's coming? Well, you can look at what has happened in past inflationary cycles, and try position yourself to have the least negative impact / most positive outcome - or you can make up other scenarios. I'd like to do what others did who came out of the 70s in a strong financial position. I'm not making it up, I'm looking it up.

Yep, it's my opinion. Can't find my crystal ball either. But - My 'specific scenario' is really just from trying to learn from the past (primarily stagflation) - whether anyone else positions themselves that way or not - that's up to them. But I am looking at what I do think is really coming, and how I can best position myself. And then I'm also putting myself in the place of an able, ready & willing buyer / renter person - and seeing how that looks.

Hey- by the way - when your rent goes up... You say in your comment you can move. But - where do you move? Why didn't you just move there in the first place? How much does that cost?

When my mortgage payment goes up... oh - wait.... it doesn't. : )

If house prices fall more than rents, if I am not trying to move, that's ok - my payments don't change.

If rents go down too, then maybe I screwed up. Oops. Guess I should've rented. : ( I think that's far less likely under an otherwise inflationary scenario... but it could happen.

And if I am trying to move soon and values drop and I bought - well, that's downright bad. So, if you're a person that is likely to move and you think home prices will fall between now and when you move and it outweighs the loss you'd have on possibly increasing rents - then - Wow. Don't buy a house. In fact, even if your house doesn't lose any value between now and then... Don't buy a house (cause you'll have selling costs to pay). Rent!

If house prices increase a solid amount before that happens, then it's not so bad though... and is possibly a gain. You're going to lose some money in real estate fees, maybe an excise tax (like my state has), you know; some closing costs. So plan on negating your first 9% or something like that of equity gain when you sell. Yep, factor it right in there.

Still look like a good investment? Ok. No? Ok. You do what works for you. My first house more than doubled in value before I sold it. Same with my next. The next only gained $100k. Now if I sold my current home, I'd probably lose $130k to $150k. Ouch. I bought it only 3 years ago, and it wasn't cheap. If I could have sold it two years ago & broken even - then rented for a lot less than my mortgage till now - that would have been good. Then I could pick up one of these bargains in my neighborhood for much less, & snagged these current better interest rates. Oh well.

'Mr. Salesman' here also lost money building & developing - for me it was about the same as my previous gains though, but it still hurts.

But, I still have a duplex, and even today that would probably bring me over $100k in net profit plus my initial down payment back if I sold it - but I don't want to, it cash flows every month. Plus, it'll be paid off in 10 years even if I spend the all the cash it's flowing. (which I am doing) After the mortgage is paid, I have a nice, unending, larger income stream that I could purchase more property with - or spend. I also have 27.5 years of depreciation on the structure I can contintue to write off, a little tax bonus.

You get... What? To call your landlord & plead for him to allow you to put in surround sound wiring? Or to allow you to change the color in the bedroom? Or ask why the rent is going up again? Oh that's right, you can move if you don't like the rent increase.... There you go.

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Jon Selin, "jonselin"
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Jimmy, if you have enough money to buy a home outright, then good for you. Keep on renting&try hit the bottom like I said in a previous post.   Why don't you share what you DID do to obtain this cash in case it helps others out here... maybe they can duplicate your success.

You are however, a bit unique. Interest rates & other inflationary considerations do not apply to you the way they would to most other potential buyers that don't have that much capital laying around & must factor in financing costs.

However, your point about having to "climb out of the depreciation hole of 10% - 20%" when someone buys... that doesn't actually change the scenario much. If my mortgage is still $1,0000/mo and your rent goes up, you still pay more monthly. If I don't get back to ground zero for that whole ten years - who cares? You're still paying $551 more per month than I do at that point, and I can still apply my 'savings' toward paying off the mortgage... then it eventually disappears - unlike your rent.

Regarding 'not doing what salesmen say'.... Whether I am pollyanna or satan or a salesman or I have a crystal ball... the messenger doesn't make truth change. He either tells the truth or not, but the truth is always the truth. If I say something that you know to be true - will you do the opposite just because I am an evil salesman?  If so, you're not a hotshot, you're an idiot.

I'm not warranting that my prediction is absolutely certain, it's just a prediction. So unknot your undies from a fear of salesmen, and just try find the truth. If I've hit on some of it, good for both of us. If not, then reject it.  Sound reasonable?

Roberto, good point. Detroit is a disaster, although I'm guessing that rents aren't quite zero, eh? I understand that a person could buy a nice older home there for $10k or $20k. Wow. I'd almost want to buy a few of those, but the entire area seems to continue in decline for now... and I like to be familiar with an area before I speculate. I'm sure there are plenty of people that will make something work out of that... maybe turn it in to a giant retirement community so folks with fixed income can afford their housing easily? So if you bought there... oops. Hasn't it been in decline for years... even when other areas were appreciating? Lesson: Try not to invest in future ghost towns. Supply & demand laws still apply.   : )

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Sounds like you had quite the roller coaster ride, Jon. I don't envy you.

It went differently for me. I bought my last house in a regular, flat market and happily sold (in 2006) to some starry-eyed fool.

I understand the intangible benefits of owning, but I believe our culture overvalues them. My family does not feel much deprived, to be living in a very large and comfortable leased house. My landlord, on the other hand -- who can't possibly sell this place for what he owes on it -- bends other backwards to keep us happy, so he can keep threading water a while longer. A rent increase isn't even on the table.

I could buy another house now, but I'm deliberately staying out of the market to maximize our gains from the last sale. We saved 100K+ just in the last year by sticking to our decision to wait. That's easy money. If to get it I had to go without control over paint colors, etc., I'm cool with that.

Reminds me of something I heard: "personal" decorating decisions cost the same whether you're a renter OR an owner. The renter can probably paint the bedroom purple if he is willing to re-paint back to original before he leaves; an owner can paint his bedroom purple but he will probably have to re-paint it before he can sell.

Boy, I've been to a lot of showings, and I can tell you, a lot of homeowners are paying twice for their decoration/remodeling projects.

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Well thanks for spewing your nonsense and taking this completely off-topic, Jon. As someone who just bought a house partially as an inflation hedge, I still think you're an idiot.

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Jon Selin, "jonselin"
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Well BMFPitt, let's say you agreed that significant inflation is likely.

What would you suggest?

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Depending on your situation and your assets, I would do a number of things. Obviously the biggest considerations are your job situation (including the capacity for your wages to keep up with high inflation) and how much you have in liquid assets.

Assuming you have a very stable, well-paying job and a significant cash reserve, buying a house (where PITI <= rent) for a historically reasonable price might be a good move. But buying (where PITI > rent) in any market where prices fell 10% or more YOY in the last 12 months is not a good move. Diversified bond funds would be a good place to keep money that you may need in the next few years. Depending on your time horizon, I'd say international stocks and commodities producers will significantly beat real estate for any amount of time that it would be rational to hold real estate for. And if you make the wrong bet in the stock market and you're not buying on margin, they don't throw you out on the street.

I fully expect to see the start of a period of double digit inflation within the next 3-5 years. But until wages start to catch up, which could be a few years, inflation will drive DOWN house prices. Higher interest rates, higher cost of food, gas, etc. How does that translate to being able to pay more for a house?

I've said it before, the best way to build equity in today's market in most places is to rent. Places where ITI+maintenance+price declines < rent are rare. It will be much cheaper to overshoot the bottom than to undershoot it. That doesn't mean nobody should buy a house. They just shouldn't buy it based on some bubble-era fantasy.

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Thanks for stepping up BMPitt, that makes sense.

As you suggest, if you're going look at a house as an investment (and all buyers should, to some degree) then you've got to compare it against other investment options. Comparing it only against the rental market, which is itself a variable, has never really made sense to me.

Of course, in my part of N. California, if you're talking about what I would call a "decent" house or better, it's still much cheaper to rent. People are claiming there are low-end properties in the Central Valley (floor) where a landlord/investor can get positive cash flow, but I don't think that's forever thing. Current rents may be inflated and have to come down as we get more unemployment and more properties on the rental market.

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Jon Selin, "jonselin"
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Ok, Did that work through the era of stagflation? (not that we are certain to mirror that era this time exactly, but I think that's about as similar a historical actual scenario as we can find) Did home prices drop from 1970 to 1982 or so with inflation&high interest rates? Not even close. So you can think of me as an idiot, but you can't change history. (By the way, I didn't buy my house as an inflation hedge, I bought it cause I really liked it - prior to the current cycle of deflation. Oh well.)

Back to inflation in history: Homeowners with mortgages through that period did especially well. Median prices at the end of that era rose. Yep, even in an inflationary cycle & weak economy. Those who bought early in that cycle had low interest rates - like now. Their equity rose. Their wages rose. Yay. Yay. Yay. Their other expenses rose. Boo. Their fixed mortgage payments became less burdensome. Yay. People who rented had rents rise significantly through that period. Boo. Maybe they were still able to invest in some other effective hedge that way outpaced inflation & rental increases. Maybe Yay?

I don't know what that investment might have been though, and most people didn't have much extra money beyond their mortgage or rent payments to invest (except the owners with fixed mortgages later down the line in the scenario thanks to inflation making their payments less impactful).   I guess that's my point.

As I said in my first post - if you can afford to buy the house outright, don't buy before the bottom. But if you're an average home buyer that must finance most of your purchase whenever you do it - and you miss the interest rates at their bottom - you're likely to miss a larger gain chasing a smaller one. I could easily see inflation driving interest rates to double what they are, but think it's very highly unlikely that home prices will decline by half. Again, inflation effects wages and therefore will mitigate home price declines to some extent, or like in the 70s - entirely.

The difference between 'back then' and now could be the affordability factor or overall price of your home... that depends on your market. Maybe prices are still so far out of whack that they need to come down more. Ok, fair enough. But many markets are now 'historically affordable' by various measures. Just do not forget the impact of changing interest rates - which can far outweigh smaller savings on house prices.

So, if you can afford to make your financing costs an insignificant part of the equation - you're right. It may be cheaper to overshoot the bottom of the market. But that's the minority of buyers. The majority will have significant financing costs, and a 15% cheaper house with a 45% higher interest rate is still a loser. Just depends on what your situation is.
Agreed?

Here's a quote from an article by a non-real-estate person (Jim Jubak) written back in 2006. I'll put the link at the end, hopefully it doesn't get edited out or lost.

"But as the 1970s proved, this theory of inflation with its focus on supply and demand doesn't explain all instances of inflation. According to Keynesian economics, it should be impossible to produce inflation during a period of slow growth and high unemployment. Slow growth and high unemployment should depress demand, leading to lower prices.The 70s: A rotten time for investorsHowever, in the 1970s, despite Keynesian theory, the economy went into a nose dive and inflation soared. Real GDP actually fell in the United States from 1973 through 1975. From 1973 through 1977, real GDP grew at an annual compounded rate of just 1.3% a year. But from 1973 through 1979, inflation averaged an annual 8.8% a year.As you'd imagine, this wasn't a great period for the stock market. According to Ibbotson Associates, the S&P 500 showed an average compounded rate of return of just 3.2% from 1973-1979. Long-term government bonds didn't do a whole lot better, with a 3.5% compounded annual return for the same period.Mind you, those were the nominal rates of return for the period, i.e., before inflation. Figure in inflation and investors lost money during these years."

That's from this article link: article link

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'a 15% cheaper house with a 45% higher interest rate is still a loser."

Nonesense, as you'd realize if you spent a few minutes to do the math.

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As you suggest, if you're going look at a house as an investment (and all buyers should, to some degree) then you've got to compare it against other investment options. Comparing it only against the rental market, which is itself a variable, has never really made sense to me.

You really need to do both in this market. In normal times with appreciation keeping in line with inflation, it's not as important to look at it as investment unless you plan to be there for a LONG time (that's 20+ years, not 5.)

Did home prices drop from 1970 to 1982 or so with inflation&high interest rates?

No. But then again, prices are flat for the decade and a half preceding it. I think the most epic bubble in the history of the world may have some bearing on how things work out this time.

Again, inflation effects wages and therefore will mitigate home price declines to some extent

During the past year, do you believe that wages have kept pace with inflation? If not, how long would you expect it to take before they catch up?

a 15% cheaper house with a 45% higher interest rate is still a loser. Just depends on what your situation is.
Agreed?

Sure, but not by much. However, I believe that a 45% rise in interest rates over a short period would cause a much larger drop in prices than 15%. And if it's not a short period, you have plenty of time to react.

According to Keynesian economics, it should be impossible to produce inflation during a period of slow growth and high unemployment.

John Maynard Keynes had apparently never heard of a printing press. He also doesn't translate well to an import-based economy where devaluing your currency can nullify any stimulus you are attempting.

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Guys, do the sums for heaven's sake - you're saying that a 5% mortgage on a 200K house is better than waiting a year and getting a 7.5% mortgage on the same house, which is now worth 170K.

This is absolutely not the case.

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it's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money for a mortgage than it does to borrow (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.

f you borrow a million dollars to buy a house, you will pay 7% or more in interest, plus property taxes and maintenance.

If you borrow a million dollar house (renting it), you will pay only 3% in rent each year.

The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because rent can cover the mortgage and all expenses if necessary, eliminating much of the risk. For a rough indication of the wisdom of buying a house, look at the yearly-rent/price ratio for the model of house in question

3% = do not buy
6% = borderline
9% = ok to buy

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Guys, do the sums for heaven's sake - you're saying that a 5% mortgage on a 200K house is better than waiting a year and getting a 7.5% mortgage on the same house, which is now worth 170K.

Assuming 3.5% down, the mortgage payment on the 200k @ 5% is $1036.07. The payment on the 170k @ 7.25% is $1147.06. Now under most circumstances, I would still say the 170k is better because you won't be 30k underwater on it, but as long as you keep saying "Do the math" I can't resist but to do it and smack you over the head with it.

On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%

Maybe 3% of peak price, but where I'm at it costs about 8-10% to rent a house in the range of what I'd be looking for. I know that because I spent a few months looking at house rentals before I bought. Taxes bring them up to just about par, with maintenance costs (and still-falling prices) giving a slight edge to renting, but not by too much.

If you borrow a million dollar house (renting it), you will pay only 3% in rent each year.

I'd like to see where you can rent a million dollar house for $2500/mo. That gets you something in the 300k-350k range here.

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"Assuming 3.5% down, the mortgage payment on the 200k @ 5% is $1036.07. The payment on the 170k @ 7.25% is $1147.06"

Well of course I know the actual payment itself is going to be higher on the lower priced home, but as you say:

" I would still say the 170k is better because you won't be 30k underwater on it"

Exactly! Being in negative equity is a far worse situation that paying a few hundred extra a month interest (which is tax deductible as well!)

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So as long as you understand that, you should probably use that information to present your argument, as opposed to saying, "Do the math." If you are to assume the buyer will stay in the mortgage for the full 30 year term, he will come out ahead with the $200k. The thing that detracts from that is the fact that staying in a mortgage for 30 years is incredibly rare these days.

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Roberto Ribas, "azrob"
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Increase your downpayment a bit on the future cheaper home(which should be easy if you are saving your money that cheaper rent affords you) and the two payments quickly become equal. In addition:

1. the one owner is upside down, cannot sell if a sudden life change comes along.
2. The buyer at 7.5% gets a better return on any extra money used to pay down the mortgage.
3. The 170K buyer has an easier time paying the house off completely.

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Well, of course I was taking it for granted that the any calculations were assuming an average 5-7 year occupancy, that hardly needed saying, did it?

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Back to inflation in history: Homeowners with mortgages through that period did especially well. ... Their wages rose.

And this is where your argument falls apart. Compare the rate of unemployment (using the U5 or U6 figure today) and wage trends for the two periods. Add to that, as BMFPitt pointed out, the general residential RE market trends leading up to both periods, and you would have a difficult time making the case that conditions in the 70s with regard to employment, wages and house price trends are comparable to today.

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I'm of the opinion that if you buy today on a 5-7 year time horizon, both the $170k and $200k would be underwater if you consider selling costs, so I was only considering the 10+ year occupancy saw the extra cash in your pocket as having a higher benefit than future resale profit. I also don't count the savings from renting because I think it's foolish to buy a house when it's cheaper to rent one, so as I noted this only applies to places where rent >= buy.

And this is where your argument falls apart.

I think the best way of explaining this is, "I believe inflation will average 8-12% for the next decade. Do you believe your wages will increase by 8-12% over that period?"

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