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Old 09-06-2015, 12:38 PM   #21
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Originally Posted by Cat-tirement View Post
I'm a couple of years ahead of you in that plan. We decided a few years back that we wanted to retire to Central Oregon. In 2012 we bought a house there when the real estate market was low (as were interest rates) but starting to recover. We have been renting it out since, which is easy to do as you noted. We will be finally moving next year.

We have been pretty sure about our choice of location. However, part of our thinking was that even if we changed our mind later about the house or location, it would be a good investment as a rental in a recovering market, so we could continue to rent it out, or easily sell it for a profit. (I estimate it's value has gone up 20% so far since our purchase.) This approach may not work as well if you're starting now.
Glad it worked out for you. I knew that 2011-2012 was a golden opportunity to buy but I was still paying off my mortgage, had only a single income, and did not have any cash (most of my retirement income will be pension). Suppose I could have refinanced my home to lower the mortgage and borrowed from my 401k for down payment but buying a home I might not like later and being a long distance landlord seemed too risky. Hopefully all of us on this thread will end up in a nice part of the western US where we can enjoy our retirement.
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Old 09-06-2015, 01:25 PM   #22
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One thing not mentioned yet is the effect of owning vs renting on SWR and tax bracket.
If you own your home outright -without a mortgage- you have less money every month, and every year that you have to withdraw from your portfolio. This lowers your SWR and potentially could allow you to substantially lower your taxes.

Think about it:
If your monthly rent or house payment were $1500 that is $18000 a year you have to come up with. If you are taking that from a tax deferred account, you owe income taxes on that so it could cost you anywhere from 10% - 39%+ more once you pay the Feds and local governments their share. And that amount more could kick you into a higher tax bracket such that it means the difference on whether your capital gains and dividends get taxed or not. If you take the money from a non taxed account it is difficult to figure generally. Each situation will depend on so many factors.

So it can be very complicated to "run the numbers."
Don't forget property taxes and maintenance costs. Also, there might additional utility costs that's already included in the rent.

There's also the opportunity cost on the downpayment, loan fees and closing costs if you're still in the accumulation phase. Of course, that's somewhat offset by increases in rent while mortgage payments remain constant.

So yes, very complicated.
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Old 09-08-2015, 11:55 AM   #23
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This NYT rent/buy tool seems to be one of the most comprehensive I have seen.
Is there a tool that calculates Rent/Buy break-even if you have no plans of selling? Basically, something that doesn't count equity in the house and just considers housing as an ongoing cost?
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Old 09-08-2015, 12:39 PM   #24
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I'm firmly in the own and carry a mortgage camp, but that's not the issue here. I would certainly rent if things were unsettled, and there's no way I would buy a house if I was only going to stay 5 years or less. It would be extremely difficult to break even on that transaction, what with the costs and fees involved in buying and selling. If you decide to stay longer, then you can look at buying. And by then you'll have a better handle on what and where to buy.
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Old 09-08-2015, 01:29 PM   #25
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Does anyone know the average length of stay in a home? ISTR it was under 5 years for the average working family. Is that an outdated statistic? Will Obamacare improve/increase mobility?
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Old 09-09-2015, 10:14 PM   #26
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5 years wouldn't make sense financially, too hard to make your money back with costs. I think your number might include rentals. According to the National Association of Homebuilders, the average for homebuyers is 13 years.
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Old 09-10-2015, 09:22 AM   #27
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This NYT rent/buy tool seems to be one of the most comprehensive I have seen.
Thanks, this is a good tool. I added a little to adjust for "decorating" expenses I know that come up with a house, but the numbers came close to what I had run.

one weird thing I never thought of was that it shows that the bigger the downpayment the more opportunity loss you have so if you put say 50% down but only stay 5 years in the house, you actually lost more money than if you had put 20% down...as that extra 30% wasn't growing in the market.

We dont' plan to stay for more than 5 years so renting makes more sense to us and I invested the money from the sale of my house in a real estate fund so I'm still diversified in real estate, just not my own property.

Not sure if anyone else has the same issues, but one other motivating factor is that we believe we will eventually end up in a 55+ community so renting makes more sense for us while we wait to turn 55.
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Old 09-10-2015, 09:40 AM   #28
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I bought a Condo outright before retiring. My logic, rents always increase, sometimes greatly. While taxes and maintenance can go up it will be much less than a rent. Also I don't want to have to worry about being kicked out at the whim of a landlord. My monthly expenses are very low since I have no mortgage. My money is tied up in the Condo, not earning any taxable return which is good since I qualify for max ACA benefits. In my state the homesteading exemption protects most of the equity from lawsuits.

In my area the rents have sky rocketed since I bought two years ago, so in hindsight a good move. So hopefully in 10 years I can sell it for more than I bought it for. Real estate has a $250,000 capital gains exclusion, so that helps as well.
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Old 09-10-2015, 10:44 AM   #29
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Old 09-10-2015, 11:50 AM   #30
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The advantage of 30 or even 15 year mortgages is you can lock in the rate that you can afford.
Problem in countries that only have typical 5 yr mortgages , is that you are victim to a rising interest issue and could literally be priced out of your home if things ever repeated and interest went back up to 18%. (around 1980)
30 year mortgages are an artifact of US mortgage bundling and securitization. All anyone is interested in is spread, since the Old Maid will wind up in some pension fund anyway.

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Old 09-11-2015, 06:25 PM   #31
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Is there a tool that calculates Rent/Buy break-even if you have no plans of selling? Basically, something that doesn't count equity in the house and just considers housing as an ongoing cost?
You can use either of the excellent links posted above; the NYT link or the Jim Collins link; just input your own numbers. I prefer the Jim Collins link for it's transparency, since I can't see how the NYT calculator is treating taxes, etc.

I'd also recommend listening to the podcast 'Why Your Home is a Terrible Investment', at least listen through the part when the interviewer reads the JCollins paper on why homes are a terrible investment. It puts things into a different perspective when evaluating them as an investment.

For example, it states that even if you own your home "free & clear" (no mortgage), you're still really renting it from the government due to tax payments. It also states that there IS an opportunity cost to buy, based on whatever equity you have in the home.

So, you may want to play around with these two methods to evaluate your situation.
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Old 09-11-2015, 06:46 PM   #32
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So far, me.

Renting vs. buying is not an easy call.

I find this post from jcollinsnh a good starting point:
Rent v. Owning Your Home, opportunity cost and running some numbers

Housing market out here is silly, so renting is better. Has been like that everywhere I lived so far. And there's the emotional factor of an asset that scares me off. But to each his own:
Why your house is a terrible investment
If you use the numbers from jlcollinsnh.com above, and input them into the NYT calculator below, the results are interesting.

In general, the NYT calculator underreports the 'cost to own' when compared to Jlcollins' calculations, making "buying" look more attractive than it might actually be, and not by a small margin.

Since I can't see 'under the hood' of the NYT calculator, it's difficult to know for sure what's causing the difference. But, if one adjusts the default 'home appreciation' & 'rent escalation' downward, the NYT results align more closely with those from Collins. In fact, if those two factors are simply 'zeroed out' (one method of neutralizing the risk that real estate can actually go DOWN in value, and modeling the philosophy that your home is NOT an investment), then the rent option becomes a lot more attractive.

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Originally Posted by Cobra9777 View Post
This NYT rent/buy tool seems to be one of the most comprehensive I have seen.

Since 1985, we have always owned. But now that we are retired, and looking to downsize, we are certainly open to renting if it makes sense. We've used the NYT tool to evaluate renting in several different areas we're considering. The results are very mixed... meaning some areas renting is better, some areas owning is better, and some areas it makes no difference.
I think the bottom line is to understand the basic mechanics of the buy -vs- rent decision, and to load your own personal situation and numbers into the analysis, instead of following the herd or, even doing what you did in the past under different circumstances (even if it worked out well for you).

In the interest of full disclosure, DW & I have bought and sold several homes, recently Semi-FIRED, and did the buy -vs- rent analysis. Our decision was to rent. YMMV.
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Old 09-11-2015, 06:55 PM   #33
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My parents moved to the place where they always thought they wanted to live. Turned out that there were some problems with paradise. I would recommend renting for a while first.
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Old 09-11-2015, 07:11 PM   #34
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You can use either of the excellent links posted above; the NYT link or the Jim Collins link; just input your own numbers. I prefer the Jim Collins link for it's transparency, since I can't see how the NYT calculator is treating taxes, etc.

I'd also recommend listening to the podcast 'Why Your Home is a Terrible Investment', at least listen through the part when the interviewer reads the JCollins paper on why homes are a terrible investment. It puts things into a different perspective when evaluating them as an investment.

For example, it states that even if you own your home "free & clear" (no mortgage), you're still really renting it from the government due to tax payments. It also states that there IS an opportunity cost to buy, based on whatever equity you have in the home.

So, you may want to play around with these two methods to evaluate your situation.
I've tried the NYT tool but my problem with it is it assumes you're gonna sell your house at the end of the period (40 years max) which makes the numbers favor buying. However, you're still gonna need a place to live until you die so I'm not quite comfortable with that assumption.

On an iPhone right now so can't find the JCollins link. Will check it out when I have access to a computer. Thanks!
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Old 09-11-2015, 07:24 PM   #35
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One more good source of rent -vs- buy analysis from Darrow Kirkpatrick.

Renting vs. Buying: The True Cost of Home Ownership - Can I Retire Yet?
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Old 09-12-2015, 03:49 PM   #36
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In general, the NYT calculator underreports the 'cost to own' when compared to Jlcollins' calculations, making "buying" look more attractive than it might actually be, and not by a small margin.

Since I can't see 'under the hood' of the NYT calculator, it's difficult to know for sure what's causing the difference. But, if one adjusts the default 'home appreciation' & 'rent escalation' downward, the NYT results align more closely with those from Collins. In fact, if those two factors are simply 'zeroed out' (one method of neutralizing the risk that real estate can actually go DOWN in value, and modeling the philosophy that your home is NOT an investment), then the rent option becomes a lot more attractive.
I too would like to see under the hood of the NYT tool. I don't see any obvious bias toward buying in the methodology. But it sure seems to lean that way. Perhaps some of the initial default values are somewhat biased, but of course those can be changed. BTW, your adjustment above does seem to create a bias toward renting:

Zero out rent growth rate... great deal for renters.
Zero out all home appreciation... not so great for buyers.
Presumably you kept inflating maintenance, insurance, and property tax... not so great for buyers; even worse for landlords with flat rent.

That doesn't strike me as realistic. Seems to me that home appreciation, rent growth rate, and inflation should all be about the same in a model like this. Pick a number; I set them all to 2% in the NYT model and left everything else at the default values. Breakeven rent is $1075/mo on a $250K house. Most $250K houses rent for $1700-2200 in the areas we are targeting to downsize.

The most powerful variable seems to be the investment rate of return, which is set to 4% in the NYT default scenario. If I drag that up to 8.9% (historical 60/40 performance), the breakeven rent only goes up to $1333. Still favors buying. And 8.9% is a fairly aggressive assumption.

I then raised the property tax to 2.1% to reflect the higher rates in Texas and lowered the marginal tax rate to 15%, which reduced the tax benefit of buying. Breakeven rent is $1506. Still favors buying.

Doubled the maintenance and renovation from 1% to 2% just for the heck of it. Breakeven rent is $1710. It's finally approaching the low end of our rental range. But as you might have guessed, we don't like most of the $1700/mo options.

Now, all of the above assumes the default mortgage settings. Our initial thinking is to either rent or buy with cash using roughly half the proceeds from the sale of our current home. If I drag the down-payment up to 100% (all cash purchase), the breakeven rent skyrockets to $2344, which finally favors renting, although not by a landslide. This is not surprising since the investment return is still set to 8.9%. If I moderate that to - say - 6.5%, breakeven rent drops to $1929... right in the middle of my market range, so rent vs buy doesn't seem to matter much.

Bottom line, I have messed around with the NYT tool for several days, comparing results to other online models and my own spreadsheets. I've used rental rates and house pricing all over the country from Zillow and several other sources. I've been as realistic and unbiased as possible in the variables and assumptions. The conclusions are decidedly mixed but usually favor buying or doesn't make much difference. Renting is favored when the assumptions include a combination of high investment returns and large down-payments.

This exercise also reminded me that the rent/buy decision and "Should I pay off the mortgage?" are closely related. They're just various points on the housing decision spectrum. One extreme is to pay all cash and have nothing invested in the market. The opposite extreme is to rent and have everything in the market. Somewhere in the middle is to hold a mortgage and have a portion in the market. I've often said that we paid off the mortgage to reduce risk and uncertainty in retirement by reducing our reliance on market performance to pay monthly housing costs. I fully understand that we traded-off some upside potential. For those same reasons, and some other non-financial considerations, we're leaning toward buying instead of renting as we evaluate our downsize options. But maybe we'll take the middle ground this time and hold a small mortgage. Perhaps that's the best way to stake out a neutral position on this question of how much cash to tie up in a house.
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Old 09-12-2015, 04:04 PM   #37
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Cobra9777, I'm not sure how many years you put into the formula. Since obviously the longer you stay someplace the better it is to buy.
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Old 09-12-2015, 05:14 PM   #38
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Cobra9777, I'm not sure how many years you put into the formula. Since obviously the longer you stay someplace the better it is to buy.
For the numbers I posted, it was the default 9 years. In reality, we will probably stay longer. We are downsizing and being very particular, so hopefully it will suit our needs for a very long time. We've owned two houses, the first for 19 years and the current one for 11. And yes, as you suggested, staying longer favors buying. Once you're past the first 7-8 years however, it's not really a significant factor. So I didn't focus on that too much in my analysis. If your timeframe is less than 7-8 years, then yes, it's a very significant factor in the decision.
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Old 09-12-2015, 08:14 PM   #39
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Not sure if anyone else has the same issues, but one other motivating factor is that we believe we will eventually end up in a 55+ community so renting makes more sense for us while we wait to turn 55.
I just hit 65 years old, however I'm not yet ready to admit I'm old. And I'm certainly not interested in moving to The Villages or Dell Webb communities.

Remember that 65 is the new 55. My wife and I are very mobile and active people. And I'm just not ready to give up my Waverunner and dirt bikes.
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Old 09-13-2015, 09:33 AM   #40
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BTW, as the OP, I am 65, active physically, and plan to do photography, hiking and biking. I figure I have another 10 years(75), before I slow down a bit?
10 years is a long time to figure if Colorado is the last place for good. It may be 5, 6 or 7, who knows? It's actually complicated. I am inclined to start renting. Part of my social security can pay for it almost forever. The old house is completely paid for. I will sell it and put the money in a balance fund like Wellington or Wellesley. If the housing market crash, will buy a small condo in cash, below the price of the old house. I have a good pension and savings and will spend only 3% of my asset. If the stock market crashes and goes into recession, heck, will spend only 2% of my asset and continue to rent. When the market recover and do well, then I'm glad to spend more on travels, etc.
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