Buy home, or rent and invest in retirement account?

[JimK]

Any advice very much appreciated, thanks.

I am about to have a home built, for $135K, probably 20-25K down, hoping for 5% interest on a 30 year FHA loan. Mortgage, interest, taxes, and mortgage insurance will be around $850/mo. Currently rent for 600/mo.

I'm 54, earn 60K/yr. Plan to retire in 15-20 years. Am a professor invested in TIAA-CREF retirement plan and am told at present if I roll my 403B into an annuity, I will get roughly what I do now after taxes for life if I contribute no extra into retirement. Employer contributes 11%, I contribute 7% and currently no additional to retirement.

I have rented all my life, but am thinking about getting this home in time to get the 8K tax credit. The price on the home is good, I've researched the market here in Las Cruces, NM, for 6 months. The market took a small hit in the last 1-2 years, but not like some places. In this town of 100,000 there are 1200 homes for sale. Sales are now taking off but prices are stagnant or declining at the moment.

My friend feels I would be wiser to rent for life, and put the difference between my rent and the mortgage (~$250/mo) into additional retirement contribution (pretax), as this money earns 20% being pretax, while my mortgage might not earn any due to appreciation and mostly goes to interest.

My goal is to maximize financial security in retirement.

Any advice greatly appreciated. Happy to provide any further info.

Thanks.
Jim

[Brat]

Why are you having a home built? With so many currently for sale in your market can you find a home that is 5-10 years old that meets your needs in that price range? The reason I ask is that many new homes suffer from what my DH terms 'workman s**t' issues. A home that is slightly older will show construction defects.

Unless you have a knowledgable construction professional write/review specifications for your home and observe it during construction I would be wary. The fact that a building inspector says it is OK isn't enough.

[JimK]

Quote:

Originally Posted by Brat Why are you having a home built? With so many currently for sale in your market can you find a home that is 5-10 years old that meets your needs in that price range? The reason I ask is that many new homes suffer from what my DH terms 'workman s**t' issues. A home that is slightly older will show construction defects. Unless you have a knowledgable construction professional write/review specifications for your home and observe it during construction I would be wary. The fact that a building inspector says it is OK isn't enough.

Thanks. It's being built by a builder with 30 years in this area, and an excellent reputation. I can not get anything on the used market remotely close in value to what he is building me on this lot he needs to sell.

Any thoughts on my question?

Thanks,
Jim

[Brat]

$135,000 would be a steal in the Pac NW. Assuming you intend to live there for many years I would buy a home. Spend a bit more to buy materials that have a longer service life, reduce your utility costs or make it suitable for someone with a mobility issue. I know you are 54 but aging has a habit of catching us when we aren't prepared.

Do not assume that your new home will increase in market value, do not think of it as an investment - it is your home.

[JimK]

Good thoughts. Thanks much.

[haha]

Quote:

Originally Posted by JimK Good thoughts. Thanks much.

It sounds like you can easily afford this home, and that your future income needs are well covered by your annuity.

Build the home; you will be happy and all will be well. I rent, but if I coiud build a quality house for what you are paying, in a place I wanted to be, I would jump at it.

ha

[mathjak107]

Quote:

Originally Posted by JimK Any advice very much appreciated, thanks. I am about to have a home built, for $135K, probably 20-25K down, hoping for 5% interest on a 30 year FHA loan. Mortgage, interest, taxes, and mortgage insurance will be around $850/mo. Currently rent for 600/mo. I'm 54, earn 60K/yr. Plan to retire in 15-20 years. Am a professor invested in TIAA-CREF retirement plan and am told at present if I roll my 403B into an annuity, I will get roughly what I do now after taxes for life if I contribute no extra into retirement. Employer contributes 11%, I contribute 7% and currently no additional to retirement. I have rented all my life, but am thinking about getting this home in time to get the 8K tax credit. The price on the home is good, I've researched the market here in Las Cruces, NM, for 6 months. The market took a small hit in the last 1-2 years, but not like some places. In this town of 100,000 there are 1200 homes for sale. Sales are now taking off but prices are stagnant or declining at the moment. My friend feels I would be wiser to rent for life, and put the difference between my rent and the mortgage (~$250/mo) into additional retirement contribution (pretax), as this money earns 20% being pretax, while my mortgage might not earn any due to appreciation and mostly goes to interest. My goal is to maximize financial security in retirement. Any advice greatly appreciated. Happy to provide any further info. Thanks. Jim

its all about having a retirement income to pay for your lifestyle. it dosnt matter how you fund housing costs whether you buy or rent...

if instead of buying a home you bought a rental property instead that gave you enough to pay your rent every year and maybe even a little extra each month are you at a disadvantage to a homeowner by renting? of course not... and if it wasnt a rental property but your investment portfolio that you saved instead of buying a house that was generating that income is it any different?.

here in nyc my first home in 1987 was 169,000... today its 440,000.... that same 169,000 invested in the fidelity insight newsletter i have been using since then is worth 1.8 million.

today i could actually have subtracted out all the rent i would have paid and bought 2 houses ...

the point is it matters not whether you buy or rent, its all about what you do with the money you didnt spend by not buying .

here in new york aside from a massive down payment rents are about 25% or so lower then buying costs...

at 3% rent increases on average it would take a decade to catch up...in the meantime long term a diversified portfolio can return 6-7% or almost double any rent increase


if you want a home for the purpose of owning a home then buy it but if its purley financial then you have to work those numbers very carefully and since you cant predict future market performance of anything you may not be able to compare

[ziggy29]

This question can often be answered by others financially based on reasonable future expectations, but not from the standpoint of the emotion or psychology of the person involved in the dilemma. There is a comfort/emotion/psychology component which only you can assign a value to. And since we don't know how you value those things, we can only answer what WE would do based on how we value those things ourselves, which could be wildly different from how you see it.

There's more to "rent vs. buy" and "pay off debt vs. invest" -- two often-debated but never agreed-upon topics here -- than just the numbers.

[RunningBum]

Rent will probably go up every year, so if you have a fixed rate mortgage, that difference between rent and mortgage will shrink and probably go the other way at some point. And don't forget the tax advantage of having a mortgage.

Search for threads on this. There's also the home maintenance cost, and other issues people bring up.

[mathjak107]

rent may go up every year , usually by 2-3 % in most areas, a good portfolio can go up 6-7 % long term average and easily pay those increases.... we just dont know what markets will do, how much your house will rise or fall and how much your taxes and expenses may rise..

the tax deduction is almost a moot point, both renters and homeowners get the same standard 11,400 deduction regardless if married or 5700 if single ..

all calculations should start above that point. with the amt being more and more common both could end up with no deductions anyway.

dont forget a homeowner is actually paying an extra approx 3 bucks over and above the price of the house... its an expense..... if a renter has other deductions for other expenses and both arrive at the same dollar total in deductions its a moot point as to what the total tax deduction is for....

we like to try to subtract the deduction off the house but the reality is its just as much an expense as any other tax deductable expense .. think of it as if credit card interest was deductible and you bought something for the house... would you subtract the deduction off your housing expense?? nooooo the deduction gets lumped together with all the other deductions .

the mortgage interest , the taxes all fall under expenses regardless of what they are for.

if you mortgaged a rental property and bought your home with the money, would you still subtract the interest your paying off your housing cost of your home or would it just go on to your tax form and be a general deduction that gets lumped with all the others.. also as the mortgage goes on you pay less and less interest until towards the end you barely have a deduction on it at all

its hard to explain the logic but hopefully you may figure out my point and if you do explain it to me ha ha ha.... i know what am trying to say but its soooooooooo confusing ha ha ha

[mathjak107]

lets try this: ill try to simplify the amounts . we will use the standard deduction for married at 11,400.00
the homeowner has 11,400 in mortgage interest, 11,400 in state and local taxes and 11,400 in real estate taxes ( sounds like ny where i live)

the renter has:

11,400 state and local taxes, 11,400 in deductable medical expenses and a 11,400 contribution.....

the issue is should the homeowner really reduce his costs allocated to his home ?, where should he start from as any of the 11,400 for any of the above paid can account for the standard deduction? is the renter who overall had the exact same deductable expenses overall at exactly the same amount as the homeowner but who merely had different expenses really any worse off or better off than the homeowner as far as deductions go?



and should the renter who barely has any deductions but gets the full 11,400.00 deduction subtract that off his housing costs like the homeowner takes the first 11,400.00 and counts it ?

im not seeing any difference between the 2 as far as deductions reducing housing costs... its all just different allocations of expenses...... the homeowner is grouping his house expenses, the tenant is grouping his other expenses but neither one is an advantage or dis-advantage..all expenses take money out of your piggy bank and all deductable expenses put the same amount back.

lets say the homeowner pays 500.00 bucks interest on 1,000.00 payment each month, hes actually paying an expense of 500 for interest over and above the house price... i dont see getting back 1/3 of that extra money paid out as an advantage.... its an expence , just like a renters medical is an expense and he gets part of that back....


if you had no mortgage and paid no interest that would be an advantage. not a tax deduction for extra money you had to spend

this made my hair hurt!

[RunningBum]

I'm not going to rehash this one very long, but I don't get your example at all. You're comparing a buyer with typical deductible expenses with a renter with very high medical expenses and charity contributions as the same situation? Why wouldn't the owner have those same extra expenses?

I do understand you're saying that if you're not above the standard deduction, you can't count the whole mortgage as deductible. But those other expenses are going to be the same whether you rent or buy. Those are the ones you could first when comparing to the standard deduction. The mortgage and property tax goes on top, because that's the variable in this equation. If the other stuff already puts you above the standard deduction, the mortgage is fully deductible (unless your deductions are phased out due to high income). If the mortgage puts you over the standard deductible, only that amount above is what you factor in.

Bottom line is, run all of the numbers, including the part of tax advantage of the mortgage and property taxes that is above the standard deduction, the potential return of money you could be investing if you rented, rental increase estimates, house appreciation estimate, owner maintenance, and so on.

And then there's the intangibles of whether you'd rather rent or own. Renting gives you more flexibility to move, owning means a landlord can't kick you out and you can make your own improvements as you wish, etc.

[RunningBum]

Quote:

Originally Posted by mathjak107 dont forget a homeowner is actually paying an extra approx 3 bucks over and above the price of the house... its an expense.....

I also have no idea what this 3 bucks is.

[REWahoo]

Quote:

Originally Posted by RunningBum I also have no idea what this 3 bucks is.

Isn't it the one with Millard Filmore on the front?

[W2R]

Quote:

Originally Posted by ziggy29 This question can often be answered by others financially based on reasonable future expectations, but not from the standpoint of the emotion or psychology of the person involved in the dilemma. There is a comfort/emotion/psychology component which only you can assign a value to. And since we don't know how you value those things, we can only answer what WE would do based on how we value those things ourselves, which could be wildly different from how you see it. There's more to "rent vs. buy" and "pay off debt vs. invest" -- two often-debated but never agreed-upon topics here -- than just the numbers.

(emphasis mine)

This is really all we can say, I agree.

I would buy a house under $150K that I really, really liked, pay it off as fast as I could, and then retire a whole lot earlier than age 69-74 (the planned retirement age of the OP). But there is no way to know whether or not that is the best choice for somebody else.

[mathjak107]

its very difficult to compare after tax cost of buying to renting.. lets dis-regard the standard deduction issue so as not to get that confused in the mix

lets say you pay 2,000 a month mortgage, lets say all but 200 bucks counts as a deduction.... so you would take 1/3 or so assuming the 30% tax bracket and figure your net cost around 1300 bucks or so and compare that to renting. lets assume no downpayment as long as we are making this up. by the way this is what i disagree with.

same scenerio, a buddy loans you the money interest free , you pay him 2,000 a month and no deduction ... example 1 your figuring 1300 a month, example 2 your figuring 2,000 a month.well which figure are you comparing to renting.

dont forget the same thing happens as you pay down a mortgage, your still paying the 2,000 a month but your tax deduction shrinks to nothing...

interest is an expense, like your insurance, like your utilities , the bugman, the gardner , un-reimbursed real estate taxes etc..... these are all expenses and anything un-reimbursed either thru tax deductions or rebates should be lumped together and added up ..... thats your real cost...

the other side of the page is your assets , the refund money from your taxes , the equity gained from your house payments, rebates etc all get accounted for here...... its the whole ball of wax you have to look at... trying to pull out a mortgage interest and real estate tax expense and subtract the deduction part from your monthly cost is rediculious , it wont show you anything ....

thats why i said before its the total of all deductions on your tax form that matters... paying the bank a mortge bill for interest is an expense the same as a doctor bill, a dentist bill or any bill, you may get some back in your tax refund but basically an expense is an expense.... the refund comes all lumped in as part of all your other deductions in one total check reflecting your overall tax situation.it adds to your asset side as a whole when you put the check in the bank, it should not be subtracted off individual items trying to figure out some cost of an expense less the tax refund check... if you had an amt tax penalty how would you pro-rate it against your housing expenses if you were trying to do an after tax cost per month...


thats what i was trying to say earlier with the example of the renter with the high medical and the homeowner with mortgage expense...an expense is an expence ,they all get added together and its the sum of them all that determine your overall tax situation. its all of them together thats your total refund whether you rent or own... same total expenses but different deductions... because one has more or less deductions dosnt mean a owner did better then a renter anymore then that owner who had no deductions for interest because his friend loaned him the money interest free.

.
follow that?......

[mathjak107]

Quote:

Originally Posted by RunningBum I also have no idea what this 3 bucks is.

assuming the 30% tax bracket you will be pulling 3 dollars out of your piggy bank over and above the cost of the house to pay the expense of your mortgage interest and real estate taxes. you will get back only 1 buck in a tax deduction...poor piggy is still 2 bucks poorer

[RunningBum]

Quote:

Originally Posted by mathjak107 very simply its very difficult to compare after tax cost of buying to renting.. lets dis-regard the standard deduction issue so as not to get that confused in the mix lets say you pay 2,000 a month mortgage, lets say all but 200 bucks counts as a deduction.... so you would take 1/3 or so assuming the 30% tax bracket and figure your net cost arount 13000 bucks or so and compare that to renting. lets assume no downpayment as long as we are making this up. same scenerio but a buddy loans you the money interest free , you pay him 2,000 a month and no deduction ... example 1 your figuring 1300 a month, example 2 your figuring 2,000 a month.well which figure are you comparing to renting. dont forget the same thing happens as you pay down a mortgage, your still paying the 2,000 a month but your tax deduction shrinks to nothing... interest is an expense, like your insurance, like your utilities , the bugman, the gardner , un-reimbursed real estate taxes etc..... these are all expenses and anything un-reimbursed either thru tax deductions or rebates should be lumped together and added up ..... thats your real cost... the other side of the page is your assets , the refund money from your taxes , the equity gained from your house payments, rebates etc all get accounted for here...... its the whole ball of wax you have to look at... trying to pull out a mortgage interest and real estate tax expense and subtract the deduction part from your monthly cost is rediculious , it wont show you anything .... thats why i said before its the total of all deductions on your tax form that matters... paying the bank a mortge bill for interest is an expense the same as a doctor bill, a dentist bill or any bill, you may get some back in your tax refund but basically an expense is an expense.... the refund comes all lumped in as part of all your other deductions in one total check reflecting your overall tax situation.it adds to your asset side as a whole when you put the check in the bank, it should not be subtracted off individual items trying to figure out some cost of an expense less the tax refund check... if you had an amt tax penalty how would you pro-rate it against your housing expenses if you were trying to do an after tax cost per month... follow that?......

Not really. For one, I don't see how an interest free loan would have the same cost as a mortgage loan. If you're going to give examples, they ought to make sense, and not compare apples and oranges.

I didn't use any numbers or examples. All I said is that there IS a tax advantage to the mortgage interest, which reduces the impact of that expense. It's true that not everyone can deduct it, but if you can, you consider it. I don't know how you can dispute that. Unless you can't deduct it, it simply isn't the same expense as your non-deductible expenses.

Mortgage interest is an expense. So is property tax and insurance. Principal is not. So it really doesn't make sense to compare rent and a full mortgage payment. You should just compare the expense part of it, and also consider the tax break, if any. As you get deeper into the loan, you pay less interest (and thus get less of a tax break), but you are buying more principal, which is not an expense.

We're both saying that one should run the numbers, and it's not simple, so be sure to include all of the numbers. I never said anything to the contrary.

[mathjak107]

we both agree there....

it really dosnt matter how the monthly payment is broken out...as long as we are all aware the mortgage interest is an expense and your better off without the deduction and not paying the interest in the first place.... the interest part im trying to illustrate is just another expense , the fact you get something back dosnt make the expense a good one, or as you hear people go i want to buy a house so i have a deduction. they forget that they are spending that extra money and getting just a smidgon back ... as an expense just lump it together with all your other deductable expenses and forgot about trying to figure a monthly after tax cost... without alot of figuring and computing the future payments in the calculation as your deductions shrink to nothing you wont have much accuracy anyway...

just take the tax refund and add it to your balance sheet..
done.

[RunningBum]

By the way, the best way to run the tax numbers is to do an estimated tax return with interest and property taxes included, and without, and let TurboTax figure out what the tax break really is.

Then all you have to do is guess the upkeep expenses, house appreciate rate, investment return rate if you rented and invested the down payment and principal payments, etc. The tax break is the easy part.