PassedOut, on Apr 27 2010, 04:52 AM, said:
For home ownership, you need to compare your position after paying a mortgage for a number of years with what your position would be after paying rent for those same years.
Home ownership needs to include the position after paying the mortgage, including all the interest, plus the maintenance costs, plus the property taxes, plus the opportunity costs of the down payment, plus the capital gains tax, plus the transaction costs of selling it (6% Realtor commissions), plus a cost to represent the lack of flexibility about location, minus the mortgage interest tax credit, minus the amount of capital gains that are excluded in a primary residence.
Renting only needs to compare the rental price, possibly with the addition of the opportunity cost of any security deposit. But you gain the freedom to move around with jobs (different regions) or even life style changes (rent in the good school district only while your children are school aged).
The only two main reasons, historically, that real estate has been a good investment for many people are:
1. leverage (if you can put 0% down and make a bet with other people's money, you are doing well. Just ask GS). If you have a 1% real appreciation on real estate but only put 10% down then you are getting a 10% ROI (more or less). But of course leverage increases the returns when things are good and amplifies the losses when things are bad (as many are learning the hard way now).
2. forced savings (some folks would never save, so the monthly mortgage is a forced savings). A 401k or IRA or 403b or whatever would work too.