Better off renting?

[mathjak107]

well the way i figure it right now renting is my best deal...first off the write offs from owning can be mis-leading.....we all get the first 10 or 12,000 or so in standard deductions so subtract that right off the bat from what you think your getting back....next thing is we have had some large capital gains over the last few years and triggered the amt tax,say good bye to real estate tax write offs..and because in the years we hit the amt tax the local and state taxes have been large amounts the years where we had no capital gains to trigger the amt the large state and local tax payments and the deductions triggered the amt tax again..point is dont figure your tax benifit of ownership to heavy,you may not get it....
as i said before i bought my house in 1987...169,000...sold it a few years ago for 335,000.......also in 1987 i had a diversified mix of stock funds worth about 100,000,,,today they are over 1 million.....figuring all the rent i would have paid all those years if i didnt buy my house id be able to have rented and bought 3 houses today.............as a place to live a home is great....as an investment its debatable

 

[lets-retire]

mathjak107--It looks like you might be correct in your situation. What would your house demand for rent in 1987 and now? Compare that to what you paid in mortgage payments. You seem to be compareing different timelines. You said you sold your house a few years ago. How long ago? You also said your investments were worth a million now. Is that including the profits from your house sale?

 

[mathjak107]

mathjak107--It looks like you might be correct in your situation. What would your house demand for rent in 1987 and now? Compare that to what you paid in mortgage payments. You seem to be compareing different timelines. You said you sold your house a few years ago. How long ago? You also said your investments were worth a million now. Is that including the profits from your house sale?
house was paid for cash when i bought it in 1987....it was sold in 2004....back in 1987 the house rented for 1200 if i wanted to rent it...about 1900 or so in todays dollars...and no the million dosnt include the house sale

 

[TomSimpsonAZ]

It seems pretty obvious that every market is going to be different.  This is something that has always been on my mind because I'm 24 and my lifestyle would be more suited to a 1 BR apartment that I kept really really nice and got for super cheap.....


But.....Instead I bought a 3 BR house and have 2 roommates.....its a little annoying, like apartments can be, but at least this way I'm using my years of singleness to work for me financially.

The house was all of 130k when I bought it and costs me about 900/mo....with utilities it is about 1200/mo for everything(elec., util, cable, internet, etc.).....I charge the roommates 400/mo, so I'm paying 400/mo also and the house went up 100k in 4 years.

 

[setab]

Modhatter,

I live in the Midwest and thought about taking in a roommate, but my wife said no to the idea.

setab

 

[aaronc879]

Based upon your perspective above, I agree you should continue to rent.  You've got a low stress situation, and that is invaluable.

However, when circumstances inevitably change, consider the tax benefits of owning as well ... you can't compare $405/month rent to just the total PITI on a home.  You need to after-tax the PITI for a true comparison.

Also, considering the recent residential real estate markets, it may pay to wait, depending upon your location ... though that kind of advice has seldom fared well, historically ...

Remember that appreciation in a home can help you get to your retirement goals faster ... it has helped us greatly in the last decade.   We have been amazed at the appreciation.  There is also a handy section 1031 in the tax code that makes moving that money around much easier, without taxation.  Congress has generally been very kind to real estate.  AS they say, it isn't what you make ... it is what you keep.

Best of luck.

Everyone talks about the tax savings as being a reason i should buy instead of rent but I can't afford a house that would be expensive enough for the deductable interest to put me above the standard deduction so there is no tax savings for me. Yet another reason for me to continue to rent cheap at 405/mo ( same rent as 6 years ago).

 

[haha]

Another aspect to the use of the interest deduction in our comparisons is that even at after-tax parity, we are substantially increasing risk. If we lose a job, that deduction won''t be worth much. But we still owe the full amount of the mortgage payment every month.

Ha

 

[cute fuzzy bunny]

Ding Ding Ding!

 

[lets-retire]

Everyone talks about the tax savings as being a reason i should buy instead of rent but I can't afford a house that would be expensive enough for the deductible interest to put me above the standard deduction so there is no tax savings for me. Yet another reason for me to continue to rent cheap at 405/mo ( same rent as 6 years ago).

I'm not attempting to talk you into anything (it won't work anyway), so this is all academic.

Assuming you have decent credit the mortgage required for you to pay enough interest to reach your personal deduction amount is only about 67000, with a 6.5 % interest rate. Your payment would be about 415, but you would have the utilities that you currently don't pay and taxes/insurance. That amount would be relatively stable over the thirty years. Whereas your rent will go up, eventually.

I just looked back at your original post. Everywhere I've lived my electric has been the most expensive bill. My water/sewer typically ran from a low of 15/month to a high of 55/month. The low was the minimum to keep the water on. It was in an apartment, so essentially it was just washing and drinking. I've lived in a lot of different places. I don't know where you live so I don't even know if a condo can be purchased to 60000, but on a place that cheap your taxes will probably be way lower than your estimate. I live in a high property tax state and when I bought my house a few years ago the taxes were and still are less than 2000/year the house sold for about 145000. The last state I lived in the house was valued at 100,000, and I paid 400/year. Since your personal deduction is being taken car of by the interest on the loan the property taxes would come off your income. I also pay high insurance, it's the hurricane thing, and I pay less than 800/year. Association fees would probably be more, but you also don't have some of the maintenance expenses that a house does.

mathjak107--Since you paid cash for your house it makes it very difficult to do an apples to apples comparison. I am assuming you invested the money you would have used to pay the mortgage or rent. There are too many variables requiring access to personal information I don't want to know, to do an accurate tabulation of what would have been.

 

[TomSimpsonAZ]

Aaron, could you tell us what town you live in please? I'd like to fiddle around with realtor.com and some scenarios when I get bored at work.


Thanks in advance,

Tom

 

[aaronc879]

lets-retire-- Thanks for the info. Gives me something to think about. As far as you saying you live in a high property tax state and paid 2000/yr for a 145,000 house. The condo I was looking at was going for 85,000 and property taxes were 1850/yr. Association fees are almost 150/mo. In Wisconsin, heating bills can sometimes top 200/mo. At least insurance is only about 300/yr.

TomSimpsonAZ-- You could look up Appleton or Oshkosh Wisconsin. Thanks.

 

[lets-retire]

That heating bill a oil or gas fired furnace? I've never had one of those. Mine has always been electric. Dang those are high property taxes, but on the better side buying a place would allow you to write off those as well as your state income taxes. Currently your landlord writes off the property tax and you pay for it. Personally I hate write offs. They mean I had to spend a dollar to receive .10, but I can't afford to pay for the house in cash so at least it eases the pain.

Do they include the insurance on the structure in you association fees? They do here, so if you decide to buy insurance it's only for contents. That is a lot cheaper.

 

[aaronc879]

I believe that would be a gas fired furnace. I was a little high on the taxes that I mentioned earlier. I was going off memory. It's actually about 1675/yr... still a lot on a $85,000 condo. Unsure about the insurance being included in the association fees.

 

[TomSimpsonAZ]

Aaron, I looked up some houses in Oshkosh and came up with these.  I'm basically in your exact same situation making 45k a year and I'm 24.  I've been slowly going from 12k to 45k over the last 4 years, so I've always sort of budgeted low.  I bought my first house on 9 bucks an hour and had 3 roommates! It sucked, but it has helped tremendously in the long run.  Anyways, looking to spend 400 to 500 a month out of your own pocket would leave you with 800-1000 a month for a house if you had 1 roommate and probably 1200-1500 if you had 2 roommates.  So, with this in mind, you probably have around 120k to spend on a house, give or take 20k.  So, lets look for houses with 3 bedrooms in that area.

http://www.realtor.com/Prop/1055690449
http://www.realtor.com/Prop/1055764792
http://www.realtor.com/Prop/1055124397
http://www.realtor.com/Prop/1048611953
http://www.realtor.com/Prop/1052819033

And one of my favorites so far:

http://tinyurl.com/7wekm


All of these homes are going to cost below 600 in mortgage and with tax, title, insurance, etc will be around 700, figure in about 300 in utilities and you're at 1000 a month.  If you finance it 100% you'll be at 1100 a month or something, whatever.

Granted homeowning is a pain in the ass and stuff breaks, which is always annoying.  You'll be able to spend your younger years with a couple of roommates who are basically paying your mortgage for you and you'll have a very nice tax deduction which you really need at 43k.  Figure paying 6k in interest per year(well, your roommates are actually paying it) and then you'll get back 30% of it come tax time. 

So, two roommates at 400/mo util incl(collecting rent and then splitting utilities sucks ass, just include them, the fewer times a month you have to ask for money the better)

800 rent + 400 you = 1200 mo

You put in 400/mo just like now, but you get the principle that gets paid down over time, 1800/yr back from taxes, and you don't have to live in an apartment.

The first couple of years you'll only make like 2k in principle so 2k + 1800 = 3800 bucks for your troubles, which isn't much, but it is something.  After 5 years it starts to change dramatically and there is one more thing.....the damn thing just might appreciate a little, but never count on that, not in the midwest.


IMHO, finance a house with as little money out of pocket as possible, but get nice fixed loans. Think of it as diversifying your portfolio which is already rich with money that will have lots of time to build on itself if it is uninterrupted for the next 25 years, so don't set yourself up to have to pull a big chunk out of your 401k because you're getting your first house at 35. Make some sacrifices now and the house basically pays for itself, by 35 you have your down payment on your first house already paid from years of hard work.

 

[lets-retire]

Either way that's still high for property taxes. Darned governement.

 

[TomSimpsonAZ]

Also remember that you have the option of renting the house out later on in life and letting it pay itself off someday, creating a nice positive cash flow to help pay for your bigger and better house for you and your family.

 

[SteveR]

There is no right or wrong to this; just what works for you in the current stage of your financial life.

Speaking of RE taxes. When I lived in northern IL, my property taxes on a $350k house were $11k per year. Ouch!
Where I live now the taxes are not as bad but still high. I now have more house but half the taxes.