Why Buy a Home?

[Bestwifeever]

I will also throw in, since OP has a 1-year-old and a 2-year-old, that there is an emotional component in owning a home especially as far as children are concerned--to some people (likely OP's parents, who are urging the home purchase) that is an important factor to consider (not saying it's necessarily good, bad, or valid).

 

[samclem]

I had to leave my first apartment when it was bought and converted to condos. I like to own so that I decide when to sell and move.

+1. When I needed to move every 1-3 years because of my job, renting made much more sense than buying. Now that we want to stay in the same spot, we'd be very uncomfortable if we were renting and the owner could simply tell us to move. If the idea of packing up your things and unpacking them or having to move the kids to different schools isn't upsetting, then maybe this isn't such a big deal.

 

[haha]

Yes, I understand. Still, I couldn't hold myself back from adding my particular case, another extreme anomaly - - $873/year for property tax, no HOA, median priced home. You couldn't rent anything at all here for $146/month, much less a house.

You have Huey Long to thank for that!

BTW, my metric is really ony applicable to condos, because there the maintenance costs are right there in front of one's nose. In houses, people other than res. property investors, tend to get kind of sloppy about realizing what is really does take, or make it into a hobby and do the work themselves.

Also, the relevant metric to see if you could rent a similar dwelling to yours is not 1/12 the property tax, but a reasonable real return on your home's value. So if your home is worth $250,000, and you feel that you can get ~= 3.5% real going forward on tha tamount of proceeds, then .035*$250,000=8750. Add $500 or so for insurance, and whatever your records tell you it costs to keep your house nice, landscape your yard, and create a sinking fund of what it will costs when things need to be replaced. Then divide by 12, and you have an equivalent rent! Using this relatively low real rate is quite favorable to owning, relative to any cap rate that an actual real estate investor would consider

Ha

 

[GregLee]

Honestly, my home may not be a mansion, but it does look a LITTLE bit better than that....

__________________

Charming. Is that a realter sign in front?

 

[W2R]

Charming. Is that a realter sign in front?

Yes, but the photo was taken in 2002 right before I bought it. All the trees that you see are gone - - they were knocked down by Hurricanes Cindy, Katrina (mostly), and Gustav. Otherwise, it looks the same. I think the lawn is greener now but that's about it.

 

[W2R]

You have Huey Long to thank for that!

Yay Huey! Well, realistically the property tax here is levied by the Parish (=county), not the state. I live in a very conservative Parish where the voters are loathe to approve millage increases when they come up for a vote.

BTW, my metric is really ony applicable to condos, because there the maintenance costs are right there in front of one's nose. In houses, people other than res. property investors, tend to get kind of sloppy about realizing what is really does take, or make it into a hobby and do the work themselves.

Also, the relevant metric to see if you could rent a similar dwelling to yours is not 1/12 the property tax, but a reasonable real return on your home's value. So if your home is worth $250,000, and you feel that you can get ~= 3.5% real going forward, then .035*$250,000=8750. Add $500 or so for insurance, and whatever your records tell you it costs to keep your house nice, landscape your yard, and create a sinking fund of what it will costs when things need to be replaced. Then divide by 12, and you have an equivalent rent!

Ha

Doing the math that way, I come up with $806/month. But rent for an equivalent home in a much less desirable neighborhood is $1400/month.To be honest I am being unfair to you in this and just gently pulling your chain a little in a joking way, because Louisiana has very low property taxes, and those in my Parish are low even for here. So it's an unfair comparison.

 

[Major Tom]

HatePayingTaxes - it's a good sign that you're not automatically acquiescing to the common wisdom you are receiving from your family that you should buy a house. There are so many factors to think about, both financial and lifestyle oriented, you should indeed take your time to consider all angles. We're not exactly in one of those markets where, if you change your mind about owning, you can be reasonably confident of selling a few years later and coming out even or making money.

 

[haha]

Yay Huey! Well, realistically the property tax here is levied by the Parish (=county), not the state. I live in a very conservative Parish where the voters are loathe to approve millage increases when they come up for a vote.



Doing the math that way, I come up with $806/month. But rent for an equivalent home in a much less desirable neighborhood is $1400/month.To be honest I am being unfair to you in this and just gently pulling your chain a little in a joking way, because Louisiana has very low property taxes, and those in my Parish are low even for here. So it's an unfair comparison.

Buying seems much better where you are. Seattle as well as most other west coast cities have notoriously high prop prices relative to rents.

Ha

 

[W2R]

Buying seems much better where you are. Seattle as well as most other west coast cities have notoriously high prop prices relative to rents.

Ha

That's a very good point. I was even using my initial asking price for my house, which apparently was too high. But housing prices here are nowhere near as high as they are in your location.

 

[Packman]

I'll throw in a non-financial thought relating to retirement. I can't imagine retiring in a rental property, although I know that many do and I don't want to offend anyone. I'm retiring in a month, and I am so looking forward to "enjoying my home" when I ER. I had our house built to our specifications a few years ago and it's perfect for us. Because it's new, I don't have much maintenance. And, for me, I take a lot of pride in my home. When I was young, a home was someplace I threw my backpack between trips to bars, clubs, school, work, etc. Now my home is my castle, and will spend a great deal of time in it. I don't think I'd feel that way if I rented someone else's castle.

 

[W2R]

I'll throw in a non-financial thought relating to retirement. I can't imagine retiring in a rental property, although I know that many do and I don't want to offend anyone. I'm retiring in a month, and I am so looking forward to "enjoying my home" when I ER. I had our house built to our specifications a few years ago and it's perfect for us. Because it's new, I don't have much maintenance. And, for me, I take a lot of pride in my home. When I was young, a home was someplace I threw my backpack between trips to bars, clubs, school, work, etc. Now my home is my castle, and will spend a great deal of time in it. I don't think I'd feel that way if I rented someone else's castle.

+1

I have truly enjoyed the peace, quiet, and privacy of my own home since ER. I liked my home before ER, but enjoy it even moreso now that I can spend more time here. There is an indescribable satisfaction that I experience when looking about my own paid off home and realizing once again that this is mine.

 

[haha]

Once more, we find out that people are different after all.

Ha

 

[LARS]

I would add two things to think about beyond what others have pointed out.

First, renting could turn into a real hassle if the place you are renting isn't a long term rental investment for the landlord (or heaven forbid, you get a knock on the door one day where the sheriff says the house has been foreclosed on). Moving a lot will get old real quick (and expensive).

Second, as your kids get to school age I would think you'd want to ensure continuity of school districts, which could be affected if you are forced to find a new rental.

 

[donheff]

I'll throw in a non-financial thought relating to retirement. I can't imagine retiring in a rental property, although I know that many do and I don't want to offend anyone.

Interesting. I live in a nice townhouse in a great area and plan to stay put in retirement. But, I watch the development and would consider renting a nearby single floor, loft style place if the right one opens in the right spot and if I am pretty confident that it wouldn't go condo on me (lot of ifs, especially the last). Property is very pricey here and I could more than cover the rent with the SWR from the equity in my house. Renting, I could forget about the maintenance and if we eventually needed to move to an assisted living joint it would be easy to leave. The big worry would be a condo conversion forcing me to buy again or move.

 

[pimpmyretirement]

As another poster alluded to, the argument that "Long term it is cheaper" ignores the cost of capital tied into the home. The opportunity cost of $XXX,XXX that is tied up is significant.

Add to that you are usually investing in real estate with borrowed money, heavily influenced by emotion. It may be cheap borrowed money, but the risk of investing on leverage is very real. Over the last 4 years, between interest and principal payments, we've spent about $135k against the $310k purchase price of our house. It is now worth $225k against a mortgage of $225k. We'd like to downsize, but paying a realtor to get out costs another $15k, if we could get someone to take interest over the identical foreclosures that are as cheap as $190k.

Then there are extra costs of housing. We now have to pay property taxes, association dues, home owners insurance, a water bill, a gas bill, a garbage bill, special assesments, a bigger electric bill (darn hot summers), and other general upkeep costs. These expenses cost as much as rent did at our prior (smaller) apartment and increase every year, just like rent. They also take a lot of time to deal with.

At least we saved on taxes. Except, between my wife and I, the standard deduction is only a few thousand short of itemizing on our mortgage interest and property tax costs.

On the plus side, nobody is going to make us move or increase our rent...

 

[Rustic23]

Your 'extra cost of housing' are also paid by renters. If the property owner does not recoup these cost in the rent, they will soon be out of business. In a down market the may absorb these cost for a short period i.e. 'free rent for 6 months or No utility cost for 6 months' but just like the cable and satellite companies they have to recover those losses, and when the market turns they will.

 

[donheff]

As another poster alluded to, the argument that "Long term it is cheaper" ignores the cost of capital tied into the home. The opportunity cost of $XXX,XXX that is tied up is significant.

This is not an easy analysis. First, you have to really understand the cost factors entering into the equations - tax deductions, maintenance costs, declining interest components, etc., to figure out what are the real differences year over year. Second, to regain the opportunity costs you have to actually invest the difference. Many around here would do so, most would not and thus end up worse off.

 

[rescueme]

We now have to pay property taxes, association dues, home owners insurance, a water bill, a gas bill, a garbage bill, special assesments, a bigger electric bill (darn hot summers), and other general upkeep costs. These expenses cost as much as rent did at our prior (smaller) apartment and increase every year, just like rent. They also take a lot of time to deal with.

When we rented, those costs you stated (if covered in the rent) were recovered by apartment management via their current rent, and annual increases. Apartment owners are there to make a profit - not just give away utilities and tax assessments away as a cost of business.

Like you said, your rent did increase each year. Also, you stated you now have larger living quarters. Space (and all the utilities/taxes to maintain it) costs money.

Basically, you get what you pay for. Sure, there are instances when renting makes more sense, like the West Coast, as some had stated or for situations that would prevent a person from maintaining a home (age/illness/disability/etc.) but for me/DW it comes down to the question of if we could afford either, what "lifestyle" do we prefer, at each phase of life. While we currently own and have done so for many years, we also will consider renting in the future (as we did early in our marriage) if our lifestyle changes.

 

[Gone4Good]

I'll throw in a non-financial thought relating to retirement. I can't imagine retiring in a rental property . . . Now my home is my castle, and will spend a great deal of time in it. I don't think I'd feel that way if I rented someone else's castle.

To offer a different view: I can't imagine spending all of my time tethered to a single area of the world now that I no longer have the anchor of a job tying me there. We rented out our house last year and thought that maybe we'd go back after we were done traveling for a while. We love the space and the town. It was the perfect place for us to live during the last decade of our working lives. But what's there now? Same old same old, which is exactly what every place becomes once we stay long enough. I'd rather have the flexibility to rent a place in Paris for a couple of months and then move on to a small country house in Villa Isella, and then . . .

 

[pimpmyretirement]

I agree the cost of invested capital argument becomes invalid if a person will otherwise spend the money they would have put into the house / mortgage.

I agree that the math requires a landlord to pass the extra costs of owning a home to their tenants. I'm not sure most small landlords do this very well, however. I think many use the idea of capital appreciation to justify eating some of this.

You are right that in my emphasizing those additional household expenses, I am really saying I failed to consider 3 things when buying:

1. During initial evaluation of the rent vs. own decision, I did not grasp the full scope of the non-mortgage expenses. The comparison was made largely on mortgage vs. rent. As we went through the buying process, the reality of the recurring expenses snowballed, but we were already comitted emotionally.

2. Because this was "our" home and we did not have the flexibility to leave at will, we had a higher standard than a rental property would be held to. More space, nicer area, higher quality construction, etc. Meeting that standard made the costs of living significantly more expensive.

3. Since we'll "be here for a while", we are much more likely to invest in home improvments we enjoy. Most of them won't be recovered when it comes time to sell.

The market downturn alone makes our home purchase the biggest financial mistake we've made to date. Ignoring that, it's possible that with a non-emotional approach to purchasing, we could have done as well as renting. We certainly became emotionally invested when purchasing our current home, however. I don't know that we could prevent it in the future.

 

[rescueme]

The market downturn alone makes our home purchase the biggest financial mistake we've made to date.

It may be, depending on the "date" you are measuring against. Like they say, it ain't over till the fat lady sings ...

An example. We purchased our last home in 1979. By the mid-80's, we were (in today's term) almost "underwater", but not by much since we put 20% down - which was the minimum for a conventional note/mortgage in those days.

When we sold it in 2004, 15 years later it was for twice the price of our orignial purchase price. Long term? It worked out well.

In 2004, we had our current (retirement) home built. Over the go-go years, it had increased in "perceived value" greatly.

Today? It is "worth" less than it was during the good times. However (and for us, the most important), it is still valued at 50% more than the build price.

It's a bit like a buy/hold investor (which I/DW are). What happens today, or even for a few years, means little. What does it mean in the long term?

 

[ziggy29]

I've honestly never understood the passion and emotions that this topic seems to generate, almost as if it were religion or politics. The bottom line, IMO, is that different people have different situations and different "wants" and "needs" out of life, and that will dictate the prudent decision in many cases. I think there's a lot of projecting going on in the debate over this "controversy", where folks are injecting their own situation on others who may have radically different situations.

About the only thing I would say is that I wouldn't factor in "investment" or "price appreciation" beyond inflation into the decision to buy. Yes, the longer you live in a place the better buying looks compared to renting. But there are still no guarantees you'll be selling a place that's worth more than you paid for it (or even what you *owe* on the mortgage).

 

[martyp]

I just ER'd and my house will be paid off in less than 2 years. This was our first and only house so the CA property taxes remain low. Part of my ER plan is that the house will be paid off about the time DW considers retiring. Not paying for housing will offset most of the decrease in income.

Financially, owning a home may or may not be a good investment. Non-financially, there is a certain satisfaction to being able to do pretty much what you want with your land and house. However, some people really like (or at least don't mind) apartment living. It's a personal choice. You should do what you want. If others don't approve of your choice then don't sweat it too much.

 

[ziggy29]

Non-financially, there is a certain satisfaction to being able to do pretty much what you want with your land and house.

True. Some people value this very highly. Others place the highest value on mobility, the ability to quickly, easily and (somewhat) cheaply relocate frequently -- to not feel "anchored". Neither one is right or wrong, it's just a personal preference.

 

[Sandhog]

It may be, depending on the "date" you are measuring against. Like they say, it ain't over till the fat lady sings ...

An example. We purchased our last home in 1979. By the mid-80's, we were (in today's term) almost "underwater", but not by much since we put 20% down - which was the minimum for a conventional note/mortgage in those days.

When we sold it in 2004, 15 years later it was for twice the price of our orignial purchase price. Long term? It worked out well.

In 2004, we had our current (retirement) home built. Over the go-go years, it had increased in "perceived value" greatly.

Today? It is "worth" less than it was during the good times. However (and for us, the most important), it is still valued at 50% more than the build price.

It's a bit like a buy/hold investor (which I/DW are). What happens today, or even for a few years, means little. What does it mean in the long term?

2004-1979=15 years (No offense. I also notice as I get older time seemed much faster. When I was a young pup, I couldn't wait until I got older when a day seemed like a month. Now that I'm older and reaching other end of the life, a month feels like a day.) I'm sure in your RE numbers don't mean anything. Anyhow I just want to point out.

In 2004, the relative worth of $1,000.00 from 1979 is:

$2,600.00 using the Consumer Price Index
$2,210.00 using the GDP deflator
$2,820.00 using the value of consumer bundle
$2,510.00 using the unskilled wage
$2,770.00 using the Production Worker Compensation
$3,550.00 using the nominal GDP per capita
$4,630.00 using the relative share of GDP