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my rent vs buy decision
Old 10-07-2019, 09:41 AM   #1
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my rent vs buy decision

I need to figure out my living situation and Iím looking for opinions on my options.

Iím currently renting a one bedroom apartment and need to rent something bigger so my kids can stay with me when they are home. They are both in college, DD in her first year and DS in his last year (or close to it).

I live in HCOL area. The chances are good that I will stay in this area a long time, but part of this depends on where my kids end up. I suspect that theyíll also try and stay in this area, since this is where they grew up, but you never know.

For me to buy something, itís going to be around $700k and most likely a townhouse, even though long-term Iíd prefer a house. Thatís a harder proposition though, since whatís available is either old or expensive. So for this example, Iíll stick with looking at a townhouse.

A three bedroom townhouse costs around $670k. This is about $3k/month: $2.5k mortgage + $500 insurance/taxes and a $134k downpayment (20%).

So Iím looking at three possible options:

1. Buy. This means Iíd be paying $3k/month and a $134k downpayment which can earn me $225/month at 2% (lost income).

2. Rent. A townhouse like this rents for up to $3k/month, even though I could probably find something around $2800/month.

3. Since my kids are mostly gone at school, I really only need a bigger place when they are back during breaks. In this case, I could keep renting a cheaper one bedroom and while they are here, we can travel or get an Airbnb, etc. Assuming I rent a one bedroom for around $2k, this can save me $12k/year, which buys a lot of travel/Airbnb time.

Of course, Iím not taking into consideration any capital expenses if I buy, so it would end up costing more than $3k/month. But I think this should be minimal since townhomes are newer, Iím capable of a lot of basic repairs, and Iím not taking into consideration any potential appreciation (even though at these prices Iím skeptical Iíd see much return).

Other things to take into consideration:

1. Thereís a good chance DS will live with me after graduating college to save up so he can buy his own place. This could be a couple of years (and I wonít charge him rent).

2. Iím not sure Iíll like living in a townhouse. Iíd probably prefer to have a smaller house/yard. But on the flip-side, I know I donít like living in an apartment.

3. The downpayment significantly reduces the amount of cash I have available. My cash flow is fine, but most of my assets are tied up in tax sheltered accounts, which I canít access easily.

4. #3 above isnít really an option, even though it could be fun.

5. The longer I wait, the more after-tax cash I can accumulate. This can free me up to potentially buy something nicer. Plus, I donít know where my kids will end up and Iíd hate to buy something just to have to sell it in the future.

6. I donít like moving. Ideally, Iíd like to buy a place where I can see living well into retirement (aka, before the long-term care facility).

Having written this out, Iím thinking itís a no-brainer for me to look for a townhouse to rent. This solves my immediate problem for having space for my kids and still leaves me with a lot of flexibility. I can then decide what to do after my kids are really on their own and/or Iíve saved up enough to easily buy a home where I could see myself living indefinitely.

Am I missing anything?

And if youíve read this far, thanks!
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Old 10-07-2019, 09:43 AM   #2
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Old 10-07-2019, 10:21 AM   #3
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I like option 3. It's like you're all on "vacation"

And there is always the "air mattress" solution.
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Old 10-07-2019, 10:26 AM   #4
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My advice is to stay flexible as you never know what the children will do once they leave school. You may think you have a good idea, but it's their choices and there are many unknown variables.
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Old 10-07-2019, 10:34 AM   #5
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I like this calculator which does a graph of when you break even and does a good job of breaking down what goes into the total monthly payment. Unfortunately, I don't think it includes maintenance (which you can add in another category). It may miss other items which are in the NY Times calculator, so double check all expenses. For example, renters insurance just came to mind.

https://www.dinkytown.net/java/home-rent-vs-buy-calculator.html#

Best of luck chasing the kids. We are in the same situation...
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Old 10-07-2019, 10:49 AM   #6
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Originally Posted by pb4uski View Post
I've played around with these calculators before, but it was good to do so again.

With this calc, it really depends on "What does the future hold." The biggest variable is home price growth rate. I'm not at all convinced that a townhouse in this area will have any appreciation over the next few years.

If I set it at 0% growth, then breakeven is $3k. If I set it to 1% growth, then it drops to $2.5k. That's a big range for a very small percentage in growth.

I'm going to be conservative and assume no growth, so it's basically a wash.

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Originally Posted by RobbieB View Post
I like option 3. It's like you're all on "vacation"

And there is always the "air mattress" solution.
I know. The kids won't do an air mattress though. And we'll still do the vacations, it'll just cost me more.

Plus, I'm tiring of the apartment lifestyle. Part of this is an upgrade for me too.
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Old 10-07-2019, 11:12 AM   #7
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I would rent a bigger place.
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Old 10-07-2019, 11:22 AM   #8
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We downsized considerably and now are cramped a little mor when the kids are home. But it works. We rent bigger places when we need them. Itís an adjustment going from having more than you need to just purchasing what you need just in time. But we like the freedom so much more.
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Old 10-07-2019, 11:29 AM   #9
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Would you consider renting out one of the spare rooms on air BnB when the kids aren't with you? I have a friend who has an upstairs loft area with an attached bath and she rents it out regularly. It's been huge in giving her an extra income stream and she can control when she wants to have it occupied.
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Old 10-07-2019, 01:33 PM   #10
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Investing in Real Estate is not a bad idea instead of rent. On the long run it will pay off by rising equity. I remember 30 years ago houses (1,500 -2,000 sq ft), in area we live in, where around $120K - $170K depend on neighborhood. Currently they are $1mil - 1.5 mil. Inflation does the trick. Not every investment could gain it. Of course a purchase time is always better at the time of recession but if our Government decides to avoid recession via QE, there is another reason to buy it now.
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Stay flexible - kids are unpredictable
Old 10-07-2019, 01:42 PM   #11
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Stay flexible - kids are unpredictable

I had same concerns when I down sized. My kids left and except for a few months, stayed away (except of course occasional visits - which I managed with short term rentals/airbnb) - saved a lot of $ and prevented the "down payment" stress. I'm still renting.

Quote:
Originally Posted by tulak View Post
I need to figure out my living situation and Iím looking for opinions on my options.

Iím currently renting a one bedroom apartment and need to rent something bigger so my kids can stay with me when they are home. They are both in college, DD in her first year and DS in his last year (or close to it).

I live in HCOL area. The chances are good that I will stay in this area a long time, but part of this depends on where my kids end up. I suspect that theyíll also try and stay in this area, since this is where they grew up, but you never know.

For me to buy something, itís going to be around $700k and most likely a townhouse, even though long-term Iíd prefer a house. Thatís a harder proposition though, since whatís available is either old or expensive. So for this example, Iíll stick with looking at a townhouse.

A three bedroom townhouse costs around $670k. This is about $3k/month: $2.5k mortgage + $500 insurance/taxes and a $134k downpayment (20%).

So Iím looking at three possible options:

1. Buy. This means Iíd be paying $3k/month and a $134k downpayment which can earn me $225/month at 2% (lost income).

2. Rent. A townhouse like this rents for up to $3k/month, even though I could probably find something around $2800/month.

3. Since my kids are mostly gone at school, I really only need a bigger place when they are back during breaks. In this case, I could keep renting a cheaper one bedroom and while they are here, we can travel or get an Airbnb, etc. Assuming I rent a one bedroom for around $2k, this can save me $12k/year, which buys a lot of travel/Airbnb time.

Of course, Iím not taking into consideration any capital expenses if I buy, so it would end up costing more than $3k/month. But I think this should be minimal since townhomes are newer, Iím capable of a lot of basic repairs, and Iím not taking into consideration any potential appreciation (even though at these prices Iím skeptical Iíd see much return).

Other things to take into consideration:

1. Thereís a good chance DS will live with me after graduating college to save up so he can buy his own place. This could be a couple of years (and I wonít charge him rent).

2. Iím not sure Iíll like living in a townhouse. Iíd probably prefer to have a smaller house/yard. But on the flip-side, I know I donít like living in an apartment.

3. The downpayment significantly reduces the amount of cash I have available. My cash flow is fine, but most of my assets are tied up in tax sheltered accounts, which I canít access easily.

4. #3 above isnít really an option, even though it could be fun.

5. The longer I wait, the more after-tax cash I can accumulate. This can free me up to potentially buy something nicer. Plus, I donít know where my kids will end up and Iíd hate to buy something just to have to sell it in the future.

6. I donít like moving. Ideally, Iíd like to buy a place where I can see living well into retirement (aka, before the long-term care facility).

Having written this out, Iím thinking itís a no-brainer for me to look for a townhouse to rent. This solves my immediate problem for having space for my kids and still leaves me with a lot of flexibility. I can then decide what to do after my kids are really on their own and/or Iíve saved up enough to easily buy a home where I could see myself living indefinitely.

Am I missing anything?

And if youíve read this far, thanks!
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Old 10-07-2019, 02:53 PM   #12
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Quote:
Originally Posted by tulak View Post
I need to figure out my living situation and I’m looking for opinions on my options.

A three bedroom townhouse costs around $670k. This is about $3k/month: $2.5k mortgage + $500 insurance/taxes and a $134k downpayment (20%).
Don't you have to pay Homeowners Association fees too on the townhouse? If so, you have to include it in your monthly budget.

Quote:
So I’m looking at three possible options:

1. Buy. This means I’d be paying $3k/month and a $134k downpayment which can earn me $225/month at 2% (lost income).
When buying, you should also include the cost of the closing costs (about 1-3% of purchase price depending on your lender and another separate expense for required "prepaid costs" to be paid upfront in escrow - usually one year payment in advance property taxes, HOA and insurance) so add all these to your $134K down payment to know how much cash will be used. You can use this total amount to compute your opportunity cost or loss of income (you used 2% example). BTW, $500 for tax and insurance looks low for a $670K home, but then, I might be wrong. no harm in checking how much taxes go in your area for that townhouse.

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Old 10-07-2019, 03:22 PM   #13
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"HCOL" comes in many flavors. HCOL in CA, IL, Chicago, and several other near-bankrupt states will almost certainly mean climbing property taxes and declining property values. For example see the Chicago Tribune take on this: https://www.chicagotribune.com/opini...ela-story.html

I would not be a buyer if those are your circumstances.
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Old 10-07-2019, 05:15 PM   #14
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IMO, stay small and Airbnb. Also IMO if staying in the area long term certainly buy. Reason is even if you chose to do something different in 10 yrs, you could fire sale the home even if only getting 50% of your $ back is better than losing all your $ renting for that same time period.
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Old 10-07-2019, 05:30 PM   #15
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Quote:
Originally Posted by tb001 View Post
Would you consider renting out one of the spare rooms on air BnB when the kids aren't with you? I have a friend who has an upstairs loft area with an attached bath and she rents it out regularly. It's been huge in giving her an extra income stream and she can control when she wants to have it occupied.
This was what I was going to suggest as well. But check the HOA rules before you buy... some don't allow any vacation rental usage... even when it's a homeshare situation.
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Old 10-08-2019, 09:30 AM   #16
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Would you consider renting out one of the spare rooms on air BnB when the kids aren't with you? I have a friend who has an upstairs loft area with an attached bath and she rents it out regularly. It's been huge in giving her an extra income stream and she can control when she wants to have it occupied.
I thought about renting out on Airbnb, but I'm not sure I want to go that route. I don't really have a cashflow issue, even though extra income is always nice. For me, this decision is about either buying or renting a bigger place.

Even though I did find a new construction at $780k that has a downstairs room with bathroom and exterior entryway. It'd be perfect for an Airbnb, which is what I think the builder was thinking? Overall, the place has a slightly odd, but nice, floor plan. I could probably make it work, but it would drain me of cash. I'm not sure it's worth it.


Quote:
Originally Posted by jesaco View Post
Don't you have to pay Homeowners Association fees too on the townhouse? If so, you have to include it in your monthly budget.


When buying, you should also include the cost of the closing costs (about 1-3% of purchase price depending on your lender and another separate expense for required "prepaid costs" to be paid upfront in escrow - usually one year payment in advance property taxes, HOA and insurance) so add all these to your $134K down payment to know how much cash will be used. You can use this total amount to compute your opportunity cost or loss of income (you used 2% example). BTW, $500 for tax and insurance looks low for a $670K home, but then, I might be wrong. no harm in checking how much taxes go in your area for that townhouse.
No HOA. The townhouses I'm looking at have no dues. I've always wondered how maintenance is handled and is something I should investigate.

Regarding closing costs, good point. I can minimize this some, since I'd finance using a Penfed 5/5 ARM. This has no origination fee. I'd also pay my own taxes/insurance to avoid escrow. The tax/insurance costs is about right for this area.
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Old 10-18-2019, 03:52 PM   #17
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I went with option #1. A townhouse came on the market in exactly the area that I wanted. It's not perfect, but more than acceptable. I made an offer which was accepted and will close in a month.

I could see myself living here indefinitely if it wasn't for the stairs. That's actually why the current owners sold. They are in their 70s and moved to a condo next door. Fortunately for me, I should be good for at least the next 20 years.

Now I to figure out the fun stuff: wall colors, appliances, and other life-style enhancing improvements.
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Old 10-19-2019, 07:09 AM   #18
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Congratulations! Enjoy your new home!
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Old 10-19-2019, 10:03 AM   #19
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