Housing: Rent vs. Buy

[BigMoneyJim]

It's a bit premature for me to have a specific question, but I thought I'd see if I could stir up some conversation for me to consider. We've had plenty of "pay down mortgage vs. invest" discussions, but I think we've only skirted around rent vs. buy so far.

I'm 34 and very roughly 20 years from retirement. I just recently became debt free and have a decent pretax nest egg but no after-tax savings--yet. I'm single with no dependents.

Among the considerations for the next stage of my financial life is whether to buy a house or condo or continue to rent an apartment.

Some early thoughts of mine:

- Maintenance: I don't really have to do any maintenance on my apartment, and I like that. If I had a house I'm not sure if I'd keep up with the lawn....perhaps I'd pay a neighborhood kid to keep it tame. I'm lazy these days but am pretty handy and would fix most maintenance issues myself...if the issue bothers me enough.

- Size: I used to think that I would get a 3 bedroom, 2 bath, 2-car garage house thinking of resale value. Now I think that's a waste of space, an expense in heating/cooling the extra area a temptation for me to accumulate junk, and a lot of space to get dusty & dirty between my infrequent cleaning missions, so if I were to buy now I think I would buy a house not much bigger than my apartment (750 sq feet).

- Freedom: I can dump the apartment without much hassle and move due to my whim, job change or other unforseeable event. Not so easy with a house.

- Freedom 2: In a house I don't have to sneak my friend's dog in and out when she visits. I could turn the stereo way up whenever I want, and I can put an antenna up whereever I want (subdivision bylaws notwithstanding). I don't have to worry about my car getting towed out of the driveway if it gets a flat while I'm on vacation. (Almost happened to me once at an apartment.)

- Investment vs. "throwing away money": I've come more and more to view a house (not necessarily the land under it) as a consumable item or at least an expense. Even a paid off house needs maintenance, taxes and more utilities than most apartments. In an income loss scenario an apartment can be summarily dumped at a hit to my rental and possibly credit ratings, but a house seems is not necessarily easily and quickly dumped and could result in credit hits and ultimately foreclosure until I've paid it off. On the other hand I have to live somewhere, and short of living with relatives cheaply I'm living in a fairly nice apartment and spending rent that is nondeductible and nearly enough (or maybe really enough) for a house payment.

I think the biggest issue for me right now is that I'd like to move to another state but have no immediate plans to do so. Although recently I was seriously considering moving by February or sooner, for the moment I wouldn't be surprised if I'm still here in a year or two. (I'm in a change phase in my life and haven't figured out exactly what I want to do next.)

EDIT: There is also the question of whether to save up a down payment first or to buy earlier if I were to buy. Plenty of room for market and interest rate analysis, but I wonder what other budget effects to consider here?

EDIT 2: I'm currently the in Indianapolis area and if I move will probably move to the Fort Worth area.

 

[unclemick]

Good points - I rented until age 34, TDY and moved fairly often(aerospace). My boss got a terrific job offer and sold his duplex to me at attractive terms(1977 New Orleans area).

A girlfriend, staying in one location and positive cash flow, good tenants(didn't like being a landlord though), fish camp, 20 acres of timberland in Ms - 'Stuff' - not wanting to sell or move to get a job - precipitated my ER at age 49.

If I were single again - would rent in a heartbeat. For the freedom/flexibility if nothing else.

 

[John Galt]

Hi unclemick. I rented after I ERed except for just prior to
my divorce in 1998. I bought the house we were
renting just before we split. My ex. got the house which was okay with me as it was in town, not my
preferred location. Anyway, I continued to rent until I
remarried in 2001. I still considered renting, mainly to keep the flexibility. But with a smoker and 4 dogs, the
rental options were very limited. I am happy now that we bought instead.

JG

 

[johnblake]

I want to buy a house but the prices have skyrocketed over the last 3 years. The cost-to-own / cost-to-rent have gone up dramatically. You can't even come close to buying a place and renting out to pay the mortage (without a significant down payment). This leads me to believe that housing may be overvalued. If Indianapolis prices are sky high too, I wouldn't buy unless I was planning to live there at least 5 years.

If I were in my 20s again and living in a city with lots of young people, I'd consider buying a house, and renting to roommates. This seems like a great way for a young person to get the benefit of a nice place to live, and build wealth at the same time.

 

[retire@40]

I want to buy a house but the prices have skyrocketed over the last 3 years.  The cost-to-own / cost-to-rent have gone up dramatically.  You can't even come close to buying a place and renting out to pay the mortage (without a significant down payment).  This leads me to believe that housing may be overvalued.

I agree. Now the next question is, will the real estate market crash or will it stay at these levels for the next decade until the rest of the economy catches up?

 

[John Galt]

I don't agree at all. You just need to be smart and
pick your spots. There are fortunes to be made. I can
see opportunities all around me.

JG

 

[Marshac]

I agree.  Now the next question is, will the real estate market crash or will it stay at these levels for the next decade until the rest of the economy catches up?

I vote for sideways once prices hit that plateau.... whatever it may be.

As for the cost to rent vs cost to buy... I too have noticed this and have felt that it was an indicator that houses were overpriced. These next few years of rising rates will be interesting... I can't wait to get a better RR on my bank deposits

 

[Berkshire_Bull]

you don't seem to really want a house that badly, if at all. that may change when you get married, but why not just keep renting for now? if you want more freedom in your rental arrangement you could move into a duplex, or even buy a small condo, there will allways be a market for those among mostly elderly, but some younger people as well.

 

[KB]

You pretty much said it yourself, you don't really want to own a home at this time. You can always buy one someday if you change your mind.

I will always be a homeowner. I like having my little space in this world, and most of my net worth comes from buying homes in CA.

 

[Beachbumz]

Most of my net worth came from buying homes to, but NOT the ones I lived in. If you buy, IMHO, only buy what you need to be comfortable. Invest the rest, whether it be in rental real estate, the market or whatever.

 

[Beachbumz]

Most of my net worth came from buying homes to, but NOT the ones I lived in. If you buy, IMHO, only buy what you need to be comfortable. Invest the rest, whether it be in rental real estate, the market or whatever.

 

[johnblake]

I don't agree at all. You just need to be smart and
pick your spots. There are fortunes to be made. I can
see opportunities all around me.

JG

Let me know when your on Maui. I'd love to learn how to find fairly valued property here. Then again, maybe it's a regional issue, good values to be found in Illiniois/Texas, not much along in HI or coastal CA.

 

[John Galt]

Hello JohnBlake! Assuming you are not just kidding around..............it absolutely is a "regional thing".
Remember "location, location, location" ? For example,
in the last 2 years, four (4) single family homes (which I can see from our house) sold for 25K to 75K. Two (2)
were on the water, and they were not all fixer uppers either. I didn't run the numbers, but pretty sure they would have provided good cash flow, and the waterfront
property values are escalating. I know of other areas with
equal opportunities. Of course, knowing your area
well is very important. In my case having lived in so
many different locations, if I decided to get active
I would never runs out of deals. Buying outside
of your geographical area of expertise is iffy, even
with lots of real estate experience.

JG

 

[Nords]

Logic or emotion?

Oh, boy, here we go again-- another eternal reciprocated diatribe.

Rent vs buy
Mortgage vs debt-free
Stocks vs bonds
Domestic vs international
Growth vs dividends
Single vs married
New cars vs used
Kids vs childless
Tastes great vs less filling

All of these issues can be approached with extreme logic & financial analysis to arrive at precisely the wrong answers for our individual situations. Unless the decision will keep you chained to your workplace until you drop dead in harness, you have to choose that which makes you happiest and most able to sleep at night.

Everything after that decision is obsessed over-analysis by left-handed INTJ engineers-- and I include myself in that category.

 

[cypress]

Since you aren't in a booming housing market, the conventional wisdom most likely applies: it takes 4-5 years for buying a house to start paying off vs. continuing to rent.

Costs saved by renting:

property taxes
homeowners insurance
maintenance

Let's say you bought a modest ($150,000 home or duplex in your area). Property taxes might amount to $2500-$3000, plus insurance and maintenance.

Let's say you spend $600/ month renting = $7200/ year.

Plus, you could add in the dividends or interest you are earning on the downpayment you would have to make on a house- $30,000 x 5% = $1500.

And, buying will involve perhaps $4000-5000 in closing costs (or more).

 

[grlcndream]

In my experience - always better to buy than rent. I'm on my 3rd property now, and I have made money on each. Renting just seems like throwing away money to me.

When I do spend money on the house, I feel like I will be getting that money back in some capacity.

 

[John Galt]

I am highly biased toward real estate as an investment,
but "always better" is simply not correct. In fact,
"always better" is rare in almost any venue you can think of.

JG

 

[johnblake]

Buying outside
of your geographical area of expertise is iffy, even
with lots of real estate experience.

I agree, that's why I was puzzled when you disagreed with my post. Then I re-read it, and it's not clear that I was talking about the area where I live --- Maui Hawaii. I have little knowledge of housing prices and rents in the midwest. If the prices have been skyrocketing (like here) while the rents and salaries and job opportunities have been steady, I'd be very wary of buying if my time horizon was only 1-3 years.

 

[retire@40]

In my experience - always better to buy than rent.  I'm on my 3rd property now, and I have made money on each.  Renting just seems like throwing away money to me.

When I do spend money on the house, I feel like I will be getting that money back in some capacity.

Sometimes buying just doesn't make sense. In the northeast, it is not uncommon to find 2 family homes selling for $650K. Assuming you have $130K for the 20% downpayment, and you get a 5.75% mortgage on the remaining $520K, your monthly mortgage payment will be just over $3K. After real estate taxes, insurance, water, maintenance, and all the other expenses that go along with rental property, you will have negative cash flow even if you can rent each apartment for $1,500 a month.

In this area, housing is extremely overvalued. I don't know how many young couples manage to stay afloat when they have college loans, buy a house and a couple of cars, and want to have kids.

It will be interesting to see what will happen to real estate investments when interest rates increase again to 8% levels or higher. I wouldn't want to be the last guy buying at inflated prices.

 

[fln]

If we treat financial considerations of a home purchase similar to the market ie. it may go up and it may go down then FWIW I think it depends on your personality makeup.

I'm most comfortable and happy in a home because I value my privacy and find alot more incentives to clean and invest in living improvements thus creating a more pleasant living environment thus resulting a happier frame of mind...well you get the idea. I've struggled with 'sharing the walls' aspect in apartment/condo living and no doubt these experiences shape my view. Ultimately, it's what makes you feel good.

 

[cute fuzzy bunny]

You cant make this decision without a lot of data.

If you cant or dont want to keep up a property, rent. If you have a boatload of pets, you might have to buy. If you move all the time, rent. If you live in an area where real estate appreciates, buy. If you live in an area with a lot of hurricanes and earthquakes, rent.

Heres a fun one though...in some areas around here in No. Cal, real estate prices are through the roof, but rents are crazy good. Lots of apartments have been built, and nobody will pay a rent commensurate with the cost of a home. So you can rent pretty cheap. If I hadnt just spent the last year and a half moving two homes and consolidating them, I might have the energy to consider finding a ranch to rent and stepping out the homeownership business.

All that having been said, I've made almost as much money on real estate as I have on investments. And it was a lot easier.

 

[Nords]

In my experience - always better to buy than rent.  I'm on my 3rd property now, and I have made money on each.  Renting just seems like throwing away money to me. When I do spend money on the house, I feel like I will be getting that money back in some capacity.

Just curious, GCD-- how long is your experience? Does it extend back to the busts of the 1970s & 1980s? I'm not saying that you're right or wrong, but "getting that money back in some capacity" can turn the most optimistic owner into an ultra-long-term investor. Renting may be throwing away money compared to living under a freeway overpass, but occasionally renting is a lot cheaper than waiting for your home's value to exceed your mortgage balance.

Maui Hawaii. [...] If the prices have been skyrocketing (like here) while the rents and salaries and job opportunities have been steady, I'd be very wary of buying if my time horizon was only 1-3 years.

JohnBlake, when I read articles like this one, I wonder if it's time to call the top. http://starbulletin.com/2005/01/05/news/story1.html
Of course all bets are off if Oprah decides to buy the rest of Maui...

 

[grlcndream]

Hi Nords. My owning has only gone back to 1999 (I'm 31). I think it's all about making smart decisions in smart locations. Owned a condo in Seattle that did well (mortgage was only $675 a month - actually cheaper than renting, yet made money when I sold). Second house was a somewhat fixer upper in a desirable downtown suburb here in Orlando. Now a rental with the equity up about $50,000 in 2 years. Third and current house a deal I found downtown that appraised for $20,000 more than what I purchased it for. I will say buying is better than renting if it's a smart financial decision to do so.

 

[John Galt]

When I was an active real estate investor, I would frequently see properties for sale which I could see
at a glance could never produce a positive cash flow,
if purchased anywhere near the asking price. On those,
I just moved on. When I found a property which did cash flow (and met other requirements of course)
I would shoot the seller a lowball offer. I had to look a
long time and make a lot of offers before I closed a deal.
But, when I did buy, the deal was pretty much bullet proof. In fact, I never lost any money worth mentioning
in over 30 years of owning all sorts of real estate.

JG

 

[johnblake]

JohnBlake, when I read articles like this one, I wonder if it's time to call the top. http://starbulletin.com/2005/01/05/news/story1.html
Of course all bets are off if Oprah decides to buy the rest of Maui...

I know, I know.... and I'm really not trying to 'call the top'.
I'm just trying to find a nice place to live, without roosters hawking next to my bedroom window, and without ice dealers in the adjacent homes. When I compare the costs vs. my rent (with none of the above), it's not even close. I agree that prices could still rise, but I don't have much faith in these articles. For example, if I went back to work, I think I could earn at least 50% more working in San Diego, LA, or the Bay Area, over Maui. These articles are typically written by, or heavily quoted by people in the real estate industry. They have an incentive to move as much property as fast as possible. They'll rarely say wait, prices are likely to fall. It's always hurry up and buy now, prices will only go higher.