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Advice on rent vs buy for young couple?
Old 04-26-2019, 09:28 AM   #1
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Advice on rent vs buy for young couple?

DS has a "serious" girlfriend. The other day he mentioned that one financial advisor article suggested buying a house might not be such a great use of money for young adults i.e. it might be better to rent and invest in stocks instead. I know that this can be somewhat painful as home price appreciation, especially in California, can drive people crazy if they are renting.

My short answer was that you really have to look at the numbers and there was not a simple one-size-fits-all answer to this. I kept the answer short because he doesn't get too focused on investing for long. He is a very hard worker though and that is probably best for him right now.

So I looked around for a decent calculator that encapsulates some of this issue. Here is one that seems to almost fit the bill: https://financialmentor.com/calculat...buy-calculator. Some of the things to estimate that I think are very tough are:
maintenance and upgrade costs (including first time appliance/furniture)
rate of return on savings
rate of appreciation on house/condo (living in San Diego, California)
number of years you will stay in same house


With the 2019 tax laws, it seems that even for a fairly high income couple the tax break for housing is gone. In other words, they are unlikely to do much better itemizing (includes mortgage interest and RE taxes) then with the 24k standard deduction. If they do itemize and come up with say 28k in deductions, then the tax benefit is there but much reduced over the past tax law advantage.

Any thoughts or better sources of information on rent versus buy?
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Old 04-26-2019, 09:38 AM   #2
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I don’t have a better web site, but I would focus in the length of time DS can expect to be in the house. If only a couple years, probably better to rent. Of course, like you said, it’s very individual. He could buy a small house, fix it up and flip it in two years. He could also buy something that he could use as a starter home in his real estate empire. I know a guy that still owns the first house he ever bought. Not a millionaire maker, but it’s always done him well financially.

Personally, I think repairs are a wash. The landlord has repairs just the same as a home owner. Therefore rent includes maintenance just the same as home ownership does. It’s just packaged differently.

What does DS say he wants to do? Is he a handy person? Do either of these scenarios require financial input from you?
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Old 04-26-2019, 09:52 AM   #3
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NYTimes had an interactive calculator to help with this decision
https://www.nytimes.com/interactive/...alculator.html
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Old 04-26-2019, 10:22 AM   #4
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Originally Posted by Lsbcal View Post
DS has a "serious" girlfriend. The other day he mentioned that one financial advisor article suggested buying a house might not be such a great use of money for young adults i.e. it might be better to rent and invest in stocks instead. I know that this can be somewhat painful as home price appreciation, especially in California, can drive people crazy if they are renting.

...

Any thoughts or better sources of information on rent versus buy?
Someone who makes money by encouraging others to invest in stocks as an alternative isn't exactly the most unbiased source. But, you already know that.

What is most important to your son in this choice? Finances, lifestyle, a bit of both? If it's FOMO, that's the wrong reason to do it.

What are the financial differences in his area between renting and buying? In my area, buying is cheaper than rent. Even if someone isn't interested in cutting grass, doing repairs/maintenance, with financial discipline (don't spend the excess you're saving over paying rent), such tasks can be easily outsourced.

If someone wants to decorate/remodel as they see fit, buying is the way to go. If someone has had a series of crappy landlords, that can be an issue, too.
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Old 04-26-2019, 12:10 PM   #5
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I donít have a better web site, but I would focus in the length of time DS can expect to be in the house. If only a couple years, probably better to rent. Of course, like you said, itís very individual. He could buy a small house, fix it up and flip it in two years. He could also buy something that he could use as a starter home in his real estate empire. I know a guy that still owns the first house he ever bought. Not a millionaire maker, but itís always done him well financially.

Personally, I think repairs are a wash. The landlord has repairs just the same as a home owner. Therefore rent includes maintenance just the same as home ownership does. Itís just packaged differently.

What does DS say he wants to do? Is he a handy person? Do either of these scenarios require financial input from you?
I think DS is at the getting financially educated phase. We might consider helping them a bit should they be married and get serious about buying a home. But I want him to decide what is best.
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Old 04-26-2019, 12:12 PM   #6
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NYTimes had an interactive calculator to help with this decision
https://www.nytimes.com/interactive/...alculator.html
Looks like a good calculator. The taxes aren't quite right for the current tax laws. It appears this was developed around 2014 when the associated article was written.
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Old 04-26-2019, 12:21 PM   #7
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Someone who makes money by encouraging others to invest in stocks as an alternative isn't exactly the most unbiased source. But, you already know that.
That is what I mentioned to him.

Quote:
What is most important to your son in this choice? Finances, lifestyle, a bit of both? If it's FOMO, that's the wrong reason to do it.

...
Don't know all the answers to this. I'm just trying to be a decent information source or point him in the right direction to answer his questions.

My guess is they will first need to get married. Then look at their job stability and do the necessary calculations. Eventually they will buy and also have some stock/bond investments. In California we are probably talking about a starter home in the $500k to $600k range. Tough for a young couple.
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Old 04-26-2019, 12:49 PM   #8
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I think location is everything. I was able to get my first house with a $8k tax credit, plus all the other tax breaks back in 2012. Sold in 2014 for a nice profit. Then rented for a year and a half....then bought another home I was thinking 8+yr home. We have made it 5. If we make it another 3 I could care less about the equity but the fact I hadn't had to move in 8 years is pretty nice considering I moved about 8x in the previous 8 years lol.

Home is for someone who wants roots. Otherwise, just rent.
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Advice on rent vs buy for young couple?
Old 04-26-2019, 01:18 PM   #9
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Advice on rent vs buy for young couple?

I think kids should start to figure out adulting in their 20ís - get educated, get started in their chosen careers, start to travel/experience different cultures, have fun, rent for goodness sakes ... plenty of time later on to buy a house
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Old 04-26-2019, 02:07 PM   #10
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In general rent in expensive areas and buy in cheap areas.

Young people also tend to move/change more often making renting better.

Always invest though.
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Old 04-26-2019, 02:52 PM   #11
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DS is a city dweller (Chicago, Logan Square area). He rented first, bought a house (during the financial "crisis"), sold for a nice profit, and is now renting. He now wishes he kept the house, but, at the time, he was considering moving, so wanted to be free to make that move easily.

BTW, DS now also has a "serious girlfriend" and they have talked about buying again. I think buying with a SO can present issues, but I have kept mum. He is 37, its his life, so I let it go.
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Old 04-26-2019, 03:50 PM   #12
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.....
My guess is they will first need to get married. Then look at their job stability and do the necessary calculations. Eventually they will buy and also have some stock/bond investments. In California we are probably talking about a starter home in the $500k to $600k range. Tough for a young couple.
And in CA, is it a community property State, so if you help him out, and they divorce after a few years. You lose 1/2 the help you provided unless you are very careful or clever.
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Old 04-26-2019, 04:10 PM   #13
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And in CA, is it a community property State, so if you help him out, and they divorce after a few years. You lose 1/2 the help you provided unless you are very careful or clever.
Probably getting too far ahead of the current state of affairs although the thought of "helping out" has been discussed with DW. It would not be so much help that they would not have plenty of skin in the game. My thought is it should be a gift and then whatever happens is up to the couple but I have no experience in this.
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Old 04-26-2019, 07:22 PM   #14
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Looks like a good calculator. The taxes aren't quite right for the current tax laws. It appears this was developed around 2014 when the associated article was written.
Can you elaborate on why you think the taxes aren't quite right... it looks to me as if one inputs their marginal tax rate.... though I'm sure that it probably doesn't factor in any $10k SALT caps or anything like that... so I suspect that you are right but it is hard for me to tell given the limited output they provide.
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Old 04-26-2019, 07:29 PM   #15
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I sort of side with the financial advisor. From a purely financial perspective, in many cases renting is probably better. (BTW, DW vehemently disagrees with me on this... to her renting is "wasting money" despite my reminders that interest, property taxes and insurance are of the same nature.)

We've owned 3 homes in our lives... the first one we made a bundle on as we were in an area where prices were rising rapidly... almost doubled our money in 4 years... the second one we got out of it about what we had into it but enjoyed it 25 years... the current one, the jury is out but we are currently probably breakeven at best.

I think it best not to consider a home to be an investment... it is a place to live and if it is cheaper to buy than rent then buy. All of that said, there is also the element of satisfaction of not having to consider any greater powers if you want to hang a picture on a wall or paint a wall or whatever.
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Old 04-26-2019, 07:54 PM   #16
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Can you elaborate on why you think the taxes aren't quite right... it looks to me as if one inputs their marginal tax rate.... though I'm sure that it probably doesn't factor in any $10k SALT caps or anything like that... so I suspect that you are right but it is hard for me to tell given the limited output they provide.
If you look at the last paragraph of my OP then you will see what I am referring to.
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Old 04-26-2019, 09:02 PM   #17
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Cost of sale is stout - If they don't plan to be stuck in that one address for 5+ years I'd vote renting.We rent places for profit; sure, but there is a bunch of maintenance that the tenants don't need to address. And the ability to go play on the weekend rather than clearing the kitchen sink drain stoppage is worth something.

$500,000 starter home. sheesh. I mean SoCal, right, but the first home I bought had a large chunk of the ceiling missing and lots of other issues - including the leaky galvanized pipe plumbing, pink (whyyyyy?) siding and bad roof. Money and time all went into that place, then other beat up places we turned into rentals. Eventually that paid off and we now have mortgage free homes in Oregon and here in La Quinta - but the two together might be worth $600k. Starter home.
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Old 04-26-2019, 09:48 PM   #18
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I donít really know the ins and outs of San Diego RE. Just a guess on a home price that would be marketable some years later.
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Old 04-27-2019, 08:53 AM   #19
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I sort of side with the financial advisor. From a purely financial perspective, in many cases renting is probably better. (BTW, DW vehemently disagrees with me on this... to her renting is "wasting money" despite my reminders that interest, property taxes and insurance are of the same nature.)
I think there's too many factors to make the call, mainly the taxes/insurance and the RE market for a given area. In my area (ATL) it is often much better to buy than rent because taxes and insurance are relatively low and rents keep going up. Couple that with low mortgage rates now and you come out way cheaper over time buying a house since you're probably going to at least break even at resale. Plus big ticket maintenance items are what, maybe $2k a year? Renting will cost you more here vs. all of that, in the burbs at least.

It's also a lifestyle choice more than anything IMO.
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Old 04-27-2019, 08:53 AM   #20
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I think it best not to consider a home to be an investment... it is a place to live and if it is cheaper to buy than rent then buy. All of that said, there is also the element of satisfaction of not having to consider any greater powers if you want to hang a picture on a wall or paint a wall or whatever.
+1 on everything, but especially the bolded part.
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