Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency.
> Perhaps we do live in a bizarre market because I've done exactly what you described.
No, you rented a smaller place than a house, then invested the difference.
I said "equivalent place to rent".
I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting.
For example (since you seem to need a specific one):
A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that.
But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month.
Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die.
Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there.
Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property.
Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan.
If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him.
After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters.
Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price.
(okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).
You're handwaving a lot more that that -- all maintenance and upkeep. Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house.
You've also got hundreds a month in day to day maintenance and upkeep, not to mention the taxes and insurance and hoa fees. Oh, and a point of PMI unless you've got 120k in your back pocket for a 20% down payment.
Don't forget 6% commission, closing costs and other taxes on the sale.
Buying doesn't pencil out against renting when the rent is lower than a 30 year mortgage payment.
> Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house.
You seem to think that renters don't pay for that and owners operate a housing charity where they foot all the maintenance and other costs while renters just pay some kind of courtesy "I'm occupying your property" fee.
In many 30 year models, given a $500k home up for rent or purchase, the owner comes out somewhere between $1mil-$2mil ahead of the renter in terms of total asset ownership. After which the owner has only maintenance and taxes to pay for living while the renter continues to burn their money at higher and higher rental rates.
During the same 30 year period, the owner will have a diminishing cost of living while the renter will maintain around a steady cost (on average) meaning that not only will the owner come out wealthier than the renter, it will be easier for them to gain that wealth as per inflation.
Renting for less than the mortgage is de facto operating a housing charity or speculating on house price increases. You must rent for a good deal more than the mortgage to cover all the expenses involved.
Run the numbers on your scenario without handwaving and you'll show the homeowner taking a stark loss over the renter.
1% rule is a good place to start. That would estimate the rent would have to be 4400/mo minimum for that 600k property to cashflow. 2600/mo? no way.
It's not even close, owning wins under most existing market scenarios by pretty large and unambiguous margins. There's online calculators available since the math appears to be beyond you.
Best calculator I've found (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...), given standard values like a 4% mortgage with a 20% downpayment and a 5% investment return rate, shows your scenario break even at best over 30 years -- hardly "large and unambigouous margins".
That's an okay one, it's broken in some ways (assumes you're selling your home after the mortgage is up, or that buying 100% of the home up-front doesn't make any long-term differences. It doesn't figure into standard of living deltas over time or time-value of money.)
So now it's just your reasoning that's broken.
Here's the tl;dr - You need to pay for housing no matter what. Do you buy and rent out your property to somebody who'll pay your mortgage and costs for you? Or do you pay those costs for somebody else? Assuming an equal start, the property owner comes out somewhere around $1-2mil ahead of the renter over 30 years, and has housing in the end.
For those parameters, on a $500k property, you would need to find an equivalent property to rent for $1,491/mo for 30 years for renting to be "better". After which the renter has no housing and the owner has housing into perpetuity.
Good luck finding equivalent housing under $1,491/mo for that kind of property. In most areas in the U.S. at least, an equivalent property rents out for far higher than $1.5k/mo. In the areas I spot checked it was more in the range of $2.5-$3k/mo.
This assumes the owner only ever keeps this particular mortgage, never pays down the principal, never rents any of their rooms out or takes any other cost saving measures that aren't available to the renter.
Meanwhile percentage of income required to live in that property will stay the same for the renter while going down (relatively) for the owner.
If you fiddle with the down payment slider, you'll note that no matter what it's set to, it doesn't make all that much difference in the ratio. Set it to zero since you can finance 100% without too much fuss. Now this sets things as equal, there's no additional money to invest for the renter other than some imaginary delta they would save by renting at rates far below any available realistic market rental rate.
The renter still has to find property to rent about a thousand dollars less than the going rental rate in the market he's in, then still has to find housing at the end of the 30 year period.
If the owner decides to sell at some point along the way, they can convey the stored value of their property into their new property. The renter has simply burned all that money and will rent forever, at increasing nominal costs pegged to inflation or current market forces (whichever is greater).
So that I don't have to repeat myself again, here's an excellent write-up on the topic. Assuming an equal start, the property owner comes out somewhere around $1-2mil a head of the renter over 30 years, and has housing.
"In the areas I spot checked it was more in the range of $2.5-$3k/mo."
Exactly my point. The rent has to be above the mortgage payment by a good deal to make buying pencil out. If, as in your example, the equivalent rent is 25% less than the mortgage payment would be, buying doesn't come out ahead at all, nevermind by "large and unambiguous margins."
Your analysis link makes the same handwavey errors you did in your initial breakdown -- maintenance costs far too low, ignoring other costs involved with homeownership, etc. Interestingly enough, the link has a postscript where he redoes the analysis after people point out those errors with just a couple of those factored in (not all of them) and concludes that the renter would just about make his money back -- and that's with a rent payment about the same as the mortgage payment, not 25% less.
> A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that.
Even if rents are a bit lower now, that $2600 payment will stay approximately the same. In ten, fifteen years, those initially lower rents will have surpassed the $2600. Moreover, rent continues to be money set on fire. Less and less of that $2600 is burned on interest as time goes on.
Mortgages have ways to reduce the burn. You can choose accelerated payment plans with more frequent, smaller payments. There are ballooning options: pumping some money yearly into the mortgage to pay down principal.
I pay $30 per week in rent and maybe $30 in utility a week, after renting an apartment, and sub-letting with the owner's permission the other rooms. That's like $300 a month.
Your figures are way off.
I started with $5000 in late-2012, and 3.5 years later, I have lower six figures investments. That's enough to buy a house in some parts of the country. So I don't get why I have to wait 30 years to buy a house if I wanted to.
I'm guessing you own property with a mortgage tying you down financially and are trying to justify why you did so.
I can quit today and live for 7 years doing absolutely nothing.
You seem to not understand what "equivalent" means. Renting a room in an apartment is not the equivalent of buying (or renting) a house.
> So I don't get why I have to wait 30 years to buy a house if I wanted to.
Why don't you? Then continue to just live in one bedroom of that house and rent the rest out to make more investment income? It doesn't make sense that you aren't? In fact it sounds pretty stupid that you aren't: in one swoop you secure infinite-term housing and you can get other people to cover all of your cost of living.
> I'm guessing you own property with a mortgage tying you down financially and are trying to justify why you did so.
No not really. There's a bit left, but I can finish paying it out from savings pretty easily. It's not worth it because my interest rate makes borrowing the money essentially "free".
>I can quit today and live for 7 years doing absolutely nothing.
Can you?
Sure, I can liquidate my assets and pretty easily retire for the rest of my life to a few places my wife and I have scouted out in nice parts of the world. It wouldn't be lavish, but it would be fine.
If we're clever, we'll instead probably just rent our current house out to somebody like yourself and use the (rent - maintenance - taxes) to take out a mortgage on the same property we're thinking of buying outright for retirement and just live on the passive income forever. We'll thank the renters for funding our retirement with a gift basket full of cheap wine and summer sausages once a year. The mortgage on the place we're eyeing is not in the U.S. and current runs ~$600/mo. The rent on my house right now would run around $3k-3.5k/mo. In 30 years the rent on my house would run around $6k (keeping with expected inflation). The mortgage on the property we bought would still be $600. Feel free to do the math.
I and my wife expect to live another 40-50 years if that puts the value of property ownership into perspective for you.
Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency.
> Perhaps we do live in a bizarre market because I've done exactly what you described.
No, you rented a smaller place than a house, then invested the difference.
I said "equivalent place to rent".
I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting.
For example (since you seem to need a specific one):
A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that.
But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month.
Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die.
Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there.
Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property.
Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan.
If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him.
After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters.
Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price.
(okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).