Explain: “3% annual cost of renting is less than the 9% annual cost of owning”
The 3% and 9% figures are based on the cost of borrowing money and all the other ownership costs associated with real estate.  From the same article: http://patrick.net/housing/crash1.html Because it's usually still much cheaper to rent than to own the same   size and quality house, in the same school district. In rich   neighborhoods, annual rents are typically only 3% of purchase price   while mortgage rates are 4% with fees, so it costs more to borrow the   money as it does to borrow the house. Renters win and owners lose!   Worse, total owner costs including taxes, maintenance, and insurance   come to about 8% of purchase price, which is more than twice the cost   of renting and wipes out any income tax benefit. Imagine you are renting a house. If the cost of your annual rent is lower than X then renting is obviously the best idea from a monetary calculation. If rent is greater than Y being a landlord makes more sense. In the middle it is debatable, and the non-monetary reasons need to be considered. "The house that sells for $200,000 might rent for a range of monthly numbers. 3% would be $6000/yr or $500/mo. This is absurdly low, and favors renting, not buying. 9% is $1500/mo in which case buying the house to live in or rent out (as a landlord) is the better choice. At this level ""paying rent"" should be avoided.  I'm simply explaining the author's view, not advocating it.  A quote from the article -  annual rent / purchase price = 3% means do not buy, prices are too   high annual rent / purchase price = 6% means borderline annual rent / purchase price = 9% means ok to buy, prices are   reasonable Edit to respond to Chuck's comment - Mortgage rates for qualified applicants are pretty tight from low to high, the 30 year is about 4.4% and the 15, 3.45%. Of course, a number of factors might mean paying more, but this is the average rate. And it changes over time. But the rent and purchase price in a given area will be different. Very different based on location. See what you'd pay for 2000 sq feet in Manhattan vs a nice town in the Mid-West. One can imagine a 'heat' map, when an area might show an $800 rent on a house selling for $40,000 as a ""4.16"" (The home price divided by annual rent) and another area as a ""20"", where the $200K house might rent for $1667/mo. It's not homogeneous through the US. As I said, I'm not taking a position, just discussing how the author formulated his approach. The author makes some assertions that can be debatable, e.g. that low rates are a bad time to buy because they already pushed the price too high. In my opinion, the US has had the crash, but the rates are still low. Buying is a personal decision, and the own/rent ratios are only one tool to be added to a list of factors in making the decision.  Of course the article, as written, does the math based on the rates at time of publication (4%/30years). And the ratio of income to mortgage one can afford is tied to the current rate. The $60K couple, at 4%, can afford just over a $260K mortgage, but at 6%, $208K, and 8%, $170K. The struggle isn't with the payment, but the downpayment.   The analysis isn't too different for a purchase to invest. If the rent exceeds 1% of the home price, an investor should be able to turn a profit after expenses."
Will buying a flat which generates $250 rent per month be a good decision? Whether investing in real estate is a good decision or not depends on many things, including the current and future supply/demand for rental units in your particular area. There are many questions on this site about this topic, and another answer to this question which already addresses many risks associated with owning property (though there are also benefits to consider). I just want to focus on this point you raised: I personally think yes, because rent adjusts with inflation and the rise in the price of the property is another benefit. Could this help me become financially independent in the long run since inflation is getting adjusted in it? In my opinion, the fact that rental income general adjusts with 'inflation' is a hedge against some types of economic risk, not an absolute increase in value. First, consider buying a house to live in, instead of to rent:  If you pay off your mortgage before your retire, then you have reduced your cost of accommodations to only utilities, property taxes, and repairs. This gives you a (relatively) known, fixed requirement of cash outflows. If the value of property goes up by the time you retire - it doesn't cost you anything extra, because you already own your house. If the value of property goes down by the time you retire, then you don't save anything, because you already own your house. If you instead rent your whole life, and save money each month (instead of paying off a mortgage), then when you retire, you will have a larger amount of savings which you can use to pay your monthly rental costs each month. By the time you retire, your cost of accommodations will be the market price for rent at that time. If the value of property goes up by the time you retire - you will have to pay more on rent. If the value of property goes down by the time you retire, you will save money on rent. You will have larger savings, but your cash outflow will be a little bit less certain, because you don't know what the market price for rent will be. You can see that, because you need to put a roof over your own head, just by existing you bear risk of the cost of property rising. So, buying your own home can be a hedge against that risk. This is called a 'natural hedge', where two competing risks can mitigate each-other just by existing. This doesn't mean buying a house is always the right thing to do, it is just one piece of the puzzle to comparing the two alternatives [see many other threads on buying vs renting on this site, or on google]. Now, consider buying a house to rent out to other people:  In the extreme scenario, assume that you do everything you can to buy as much property as possible. Maybe by the time you retire, you own a small apartment building with 11 units, where you live in one of them (as an example), and you have no other savings. Before, owning your own home was, among other pros and cons, a natural hedge against the risk of your own personal cost of accommodations going up. But now, the risk of your many rental units is far greater than the risk of your own personal accommodations. That is, if rent goes up by $100 after you retire, your rental income goes up by $1,000, and your personal cost of accommodations only goes up by $100. If rent goes down by $50 after you retire, your rental income goes down by $500, and your personal cost of accommodations only goes down by $50. You can see that only investing in rental properties puts you at great risk of fluctuations in the rental market. This risk is larger than if you simply bought your own home, because at least in that case, you are guaranteeing your cost of accommodations, which you know you will need to pay one way or another. This is why most investment advice suggests that you diversify your investment portfolio. That means buying some stocks, some bonds, etc.. If you invest to heavily in a single thing, then you bear huge risks for that particular market. In the case of property, each investment is so large that you are often 'undiversified' if you invest heavily in it (you can't just buy a house $100 at a time, like you could a stock or bond). Of course, my above examples are very simplified. I am only trying to suggest the underlying principle, not the full complexities of the real estate market. Note also that there are many types of investments which typically adjust with inflation / cost of living; real estate is only one of them. Hey,  I'm majoring in a worthless field and do not expect to make much money. I've learned to find solace in the simple luxuries such as, heating,car ownership, food, warm food, meat,being able to exercise, have freedom,etc...  I'm trying to figure out what the minimum annual salary I can live on is. For example right now I'm in college and it costs $30,000 a year but I'm living *very* comfortably.    Why and how will this change in the future? Renting an apartment and supporting only myself, why can't I live comfortably on $30,000 in the future? "All life insurance is pretty much the same when it comes to cost. You can run the numbers over certain time period and the actual cost of insurance is about the same. A simplified way to explain life insurance and the differences between them below: The 3 characteristics of life insurance: There are 5 popular types of life insurance and they are: Term Whole Life Universal Life Variable Universal Life Indexed Universal Life But first, one must understand the most basic life insurance which is called Annual Renewable Term:  This is a policy that covers 1 year and is renewable every year after. The cost of insurance typically increases each year as the insured ages. So for every year of coverage, your premium increases like in the simplified illustration above. This is the building block of all life insurance, term or permanent. There is no cash value; all premium goes to the cost of insurance.  This is an ART that spans over a longer time period than 1 year (say 5, 10, 15, 20 or 30 years). All the cost is added together then divided by the number of years of coverage to give a level premium payment for the duration of the policy. The longest coverage offered these days is 30 years. There is no cash value; all premium goes to the cost of insurance. The premium is fixed (level) for the term specified. If the policy comes to an end and the owner wishes to renew it, it will be at higher premium. This can be seen in the simplified illustration above for a 15-year term policy.  Because life insurance gets very expensive as you reach old age, life insurance companies came up with a way to make it affordable for the consumer wishing to have coverage for their entire lifespan. They allow you to have interest rate crediting on the cash value account inside the policy.  To have cash value in the first place, you must pay premiums that are more than the cost of insurance. The idea is: your cash value grows over time to help pay for the cost of insurance in the later stages of the policy, where the cost of insurance is typically higher. This is illustrated above in an overly simplified way. This is a permanent life insurance policy that is designed to cover the lifespan of the insured. There is cash value that is credited on a fixed interest rate specified by the insurance company (typically 3-5%). The premium is fixed for the life of the policy. It was designed for insuring the entire lifespan of the insured. This is variation of Whole Life. There is cash value; it is credited on a fixed interest rate specified by the insurance company, but it does fluctuate year to year depending on the economy (typically 3-6%). The premium is flexible; you can increase/decrease the premium.  This is basically a universal life policy, but the cash value sits in an account that is invested in the market, normally mutual funds. Your interest that is being credited (to your account with your cash value from investments) is subjected to risk in the market, rise/fall with the market depending on the portfolio of your choosing, hence the word ""Variable"". You take on the risk instead of the insurance company. It can be a very good product if the owner knows how to manage it (just like any other investment products). This is a hybrid of the UL and the VUL. The interest rate depends on the performance of a market index or a set of market indices. The insurance company states a maximum interest rate (or cap) you can earn up to and a guaranteed minimum floor on your cash value interest that will be credited (typically 0% floor and 12% cap). It is purely a method to credit you interest rate. It takes the market risk out of the equation but still retains some of the growth potential of the market. Term policy is designed for temporary coverage. There is no cash value accumulation. Permanent policies such as whole life, universal life, variable universal life and indexed universal life have a cash value accumulation component that was originally designed to help pay for the cost of insurance in the later stages of the policy when the insured is at an advanced age, so it can cover the entire lifespan of the insured. People do take advantage of that cash value component and its tax advantages for retirement income supplement and maximize the premium contribution. Always remember that life insurance is a life insurance product, and not an investment vehicle. There is a cost of insurance that you are paying for. But if you have life insurance needs, you might as well take advantage of the cash value accumulation, deferred tax growth, and tax-free access that these permanent policies offer." "Typically mutual funds will report an annualized return. It's probably an average of 8% per year from the date of inception of the fund. That at least gives some basis of comparison if you're looking at funds of different ages (they will also often report annualized 1-, 3-, 5-, and 10- year returns, which are probably better basis of comparison since they will have experience the same market booms and busts...).  So yes, generally that 8% gets compounded yearly, on average. At that rate, you'd get your investment doubled in roughly 9 years... on average... Of course, ""past performance can't guarantee future results"" and all that, and variation is often significant with returns that high. Might be 15% one year, -2% the next, etc., hence my emphasis on specifying ""on average"". EDIT: Based on the Fund given in the comments: So in your fund, the times less than a year (1 Mo, 3 Mo, 6 Mo, 1 Yr) is the actual relative change that of fund in that time period. Anything greater is averaged using CAGR approach. For example. The most recent 3 year period (probably ending end of last month) had a 6.19% averaged return. 2014, 2015, and 2016 had individual returns of 8.05%, 2.47%, and 9.27%. Thus that total return over that three year period was 1.0805*1.0247*1.0927=1.21 = 21% return over three years. This is the same total growth that would be achieved if each year saw consistent 6.5% growth (1.065^3 = 1.21).  Not exactly the 6.19%, but remember we're looking at a slightly different time window. But it's pretty close and hopefully helps clarify how the calculation is done." "Note: I am making a USA-assumption here; keep in mind this answer doesn't necessarily apply to all countries (or even states in the USA).  You asked two questions: I'm looking to buy a property. I do not want to take a risk on this   property. Its sole purpose is to provide me with a place to live. How   would I go about hedging against increasing interest rates, to counter   the increasing mortgage costs? To counter increasing interest rates, obtaining a fixed interest rate on a mortgage is the answer, if that's available.  As far as costs for a mortgage, that depends, as mortgages are tied to the value of the property/home.  If you want a place to live, a piece of property, and want to hedge against possible rising interest rates, a fixed mortgage would work for these goals. Ideally I'd like to not lose money on my property, seeing as I will be   borrowing 95% of the property's value. So, I'd like to hedge against   interest rates and falling property prices in order to have a risk   neutral position on my property. Now we have a different issue.  For instance, if someone had opened a fixed mortgage on a home for $500,000, and the housing value plummeted 50% (or more), the person may still have a fixed interest rate protecting the person from higher rates, but that doesn't protect the property value.  In addition to that, if the person needed to move for a job, that person would face a difficult choice: move and sell at a loss, or move and rent and face some complications. Renting is generally a good idea for people who (1) have not determined if they'll be in an area for more than 5-10 years, (2) want the flexibility to move if their living costs rises (which may be an issue if they lose wages), (3) don't want to pay property taxes (varies by state), homeowner's insurance, or maintenance costs, (4) enjoy regular negotiation (something which renters can do before re-signing a lease or looking for a new place to live).  Again, other conditions can apply to people who favor renting, such as someone might enjoy living in one room out of a house rather than a full apartment or a person who likes a ""change of scenes"" and moves from one apartment to another for a fresh perspective, but these are smaller exceptions. But with renting, you have nothing to re-sell and no financial asset so far as a property is concerned (thus why some real estate agents refer to it as ""throwing away money"" which isn't necessarily true, but one should be aware that the money they invest in renting doesn't go into an asset that can be re-sold)." "Yes, there are non-stock analogs to the Price/Earnings ratio. Rental properties have a Price/Rent ratio, which is analogous to stocks' Price/Revenue ratio.  With rental properties, the ""Cap Rate"" is analogous to the inverse of the Price/Earnings ratio of a company that has no long-term debt. Bonds have an interest rate.  Depending on whether you care about current dividends or potential income, the interest rate is analogous to either a stock's dividend rate or the inverse of the Price/Earnings ratio." I don't see anything in this forum on the leverage aspect, so I'll toss that out for discussion.  Using generic numbers, say you make a $10k down payment on a $100,000 house. The house appreciates 3% per year. First year, it's $103,000. Second year, $106090, third it's 109,272.70. (Assuming straight line appreciation.) End of three years, you've made $9,272.70 on your initial $10,000 investment, assuming you have managed the property well enough to have a neutral or positive cash flow. You can claim depreciation of the property over those rental years, which could help your tax situation.   Of course, if you sell, closing costs will be a big factor. Plus... after three years, the dreaded capital gains tax jumps in as mentioned earlier, unless you do a 1031 exchange to defer it. The long-run goal is to eliminate poverty through wealth creation. If that makes for some weird new social interactions, I'd say that's a reasonable cost.  I mention comparing to earlier periods simply as a measure of progress to determine whether or not there is a problem that needs correction, such as a specific group in society experiencing real wage stagnation, or truly anemic growth rates relative to earlier periods. It's the slope of the trend line for each group that I'd be worried about, where linear or exponential is good, and logarithmic should indicate a potential crisis.  Ultimately, I believe that it's not a persons absolute circumstances that matter, but the rate at which those circumstances are improving throughout their lives that most strongly affects their subjective well-being (but that's just my theory).  As for real estate costs, you're absolutely correct that this is a problem, but it's as easily explainable problem. Supply is artificially constrained in most of the US due to the need for explicit government permission (in the form of building permits and zoning laws) in order to build new units. Basic economics says that when supply is artificially restricted, prices will rise.  In areas where government is restrictive, such as San Francisco, prices rise sharply. In places where government is more permissive, like Houston, prices remain much more reasonable.