Does a home purchase even make sense?

[Looking4Ward]

I'm living in a HCOL area so my son can attend a preferred high school. After four years when he graduates, I'm moving out of this area.

I'm currently leasing a home for $2700 a month. Comparable homes in this area sell for no less than $500K; the appraised tax value on the one I'm renting is $502K.

I've considered buying a home in the area by putting $250K down and taking out a mortgage for the other $250K. Why put down half? Because lenders are only qualifying me for $250K based on dividends and CG distributions on my last two tax returns.

Here's the monthly breakdown if I do that:

$1212 - P&I @ 4.125%
$675 - Property Taxes
$150 - HOA
$100 - Insurance
--------
$2,137 per month to "own" before any maintenance and repairs.

Wow, I save $563 a month, right? But I also lose any investment returns on the $250K that I pulled out, which have averaged 7% over the last 10 years. Nor have I included any potential tax liabilities on the additional capital gains I incur by cashing out that much.

When it comes time to sell, if the home has appreciated 3% a year I might be able to list it for $560K. Subtract 8% selling costs and the remaining mortgage balance and I'm left with $283K. Add the $563 per month I "saved" by owning and I'm up to $310K. Obviously that's best case because it doesn't account for property tax increases and maintenance/repairs.

But wait - had I left that $250K invested and continued to earn 7%, it would have grown to $337K.

Looks like I'm ahead at least $27K by renting for four years. Or am I missing something?

 

[ExFlyBoy5]

When it comes time to sell, if the home has appreciated 3% a year I might be able to list it for $560K.

Personally, I would never assume property appreciation over such a short period of time. Plus maintenance is quite an open ended variable.

 

[aaronc879]

Very rarely a good idea to buy if you know you will be moving again in under 5 years. If you are happy with the rental then stay there IMO.

 

[steelyman]

Very rarely a good idea to buy if you know you will be moving again in under 5 years. If you are happy with the rental then stay there IMO.

I agree. Also, you can’t count on return/appreciation from either investments or property in that time frame. The phrase “if you are happy with the rental” is important.

 

[COcheesehead]

$8100 for property taxes? Yikes.

 

[brucethebroker]

Have you considered:
Tax free receipt of future home appreciation/capital gains? ($250/$500k).
Tax deductible treatment of property taxes and mortgage interest?

Current tax law on residential rentals favors only the owner, not the renter. A large reason for the "better to own a house" rule.

But, buying a home makes sense, until it doesn't. You may well have found that exception.

 

[Looking4Ward]

$8100 for property taxes? Yikes.

That's actually low for this area of Austin @ 1.76% of appraised value where some areas are as high as 3.3% of appraised value.

 

[RunningBum]

I was faced with this decision, for a 5 year period, a few years ago. I ran a spreadsheet with all the numbers, including estimated investment return and house appreciation, taxes, maintenance, realtor fees, rent with increases, and buying was the winner for me. Happened to be in an area where houses were reasonably priced and rents were just a bit high. I was having a bit of trouble finding a house to rent and definitely wanted out of an apartment. I came out better than expected, so it worked well for me, but there was more risk, as well as potential for headaches selling vs. walking away from a rental.

I think at a minimum you need to do a more in depth spreadsheet with all of the factors.

 

[Looking4Ward]

Have you considered:
Tax free receipt of future home appreciation/capital gains? ($250/$500k).
Tax deductible treatment of property taxes and mortgage interest?

Current tax law on residential rentals favors only the owner, not the renter. A large reason for the "better to own a house" rule.

But, buying a home makes sense, until it doesn't. You may well have found that exception.

I haven't paid any income tax in 5 years so any potential deductions won't benefit me. I did account for home appreciation and capital gains but as others have pointed out that's not a certainty. I would think that rising home prices during favorable economic times would also mean rising investment returns but even if flat the advantage in this case goes to renting.

I think what really impacts the equation here is the relatively low rental prices commanded by homes with (artificially?) high market values.

 

[RunningBum]

Oh hey, this happened to be in the Austin area (just north), back in 2003.

edited to add:

Interesting that you are finding the opposite with rentals vs housing values there now. I bought for about $137K and sold 5 yrs later for about $188K in 2008. I think I was looking at about $1000/month rent for a house.

Sounds like you may be in West Lake. Definitely higher prices there.

 

[Looking4Ward]

I was faced with this decision, for a 5 year period, a few years ago. I ran a spreadsheet with all the numbers, including estimated investment return and house appreciation, taxes, maintenance, realtor fees, rent with increases, and buying was the winner for me. Happened to be in an area where houses were reasonably priced and rents were just a bit high. I was having a bit of trouble finding a house to rent and definitely wanted out of an apartment. I came out better than expected, so it worked well for me, but there was more risk, as well as potential for headaches selling vs. walking away from a rental.

I think at a minimum you need to do a more in depth spreadsheet with all of the factors.

The inverse appears to be true here for the time being - rental rates are relatively low compared to current market values. Yet homes in this area are under contract in a matter of days.

 

[Looking4Ward]

Oh hey, this happened to be in the Austin area (just north), back in 2003.

I'm currently in the Westlake area, Eanes ISD. There is very little if any new construction in this area, and homes in my price range are much older and in need of repair - a cost I didn't add into my scenario. An A/C replacement could heavily impact the numbers over a four year time span.

 

[Bamaman]

You're very fortunate to be living in such a great city as Austin. I understand that Austin, Nashville and a few previously low COL places are seeing unprecedented increases in real estate values.

But is there going to be a bubble? Are prices going to continue to rise as they have in the near past? Or, is the market going to fall flat with buyers' capacity to pay not increasing with prices? Four years comes around very fast.

 

[Looking4Ward]

You're very fortunate to be living in such a great city as Austin. I understand that Austin, Nashville and a few previously low COL places are seeing unprecedented increases in real estate values.

But is there going to be a bubble? Are prices going to continue to rise as they have in the near past? Or, is the market going to fall flat with buyers' capacity to pay not increasing with prices? Four years comes around very fast.

That's a good point. I personally believe this housing market is superheated right now and due for a correction soon. The fact that rental rates (in my area) are not tracking with purchase prices is an indicator to me. When mortgage rates rise there is no additional headroom here for increases in market values.

The more I think about it the wiser it seems to just rent for now.

 

[W2R]

The fact that you would start a thread with this title tells me that you have already made up your mind.

So enjoy apartment life!

 

[Looking4Ward]

The fact that you would start a thread with this title tells me that you have already made up your mind.

So enjoy apartment life!

LOL!

I'm renting a house, not an apartment. I hate apartments

 

[W2R]

LOL!

I'm renting a house, not an apartment. I hate apartments

I was JUST going back to get your quote of that,

I'm currently leasing a home for $2700 a month.

and edit my post (which you quoted and responded to in less than a minute, since the posting time is identical).

So enjoy living in somebody else's rental house that they don't want to live in themselves! I have lived in both rental houses and apartments, and wouldn't touch either with a 10-foot pole now that I can afford my own home. But you have already made up your mind.

 

[ExFlyBoy5]

I think what really impacts the equation here is the relatively low rental prices commanded by homes with (artificially?) high market values.

In my opinion (and my DW who is a licensed RE broker in several states) that is not a great sign for future home value increases.

Also, if values continue to rise, so will those high TX property taxes.

 

[RunningBum]

The inverse appears to be true here for the time being - rental rates are relatively low compared to current market values. Yet homes in this area are under contract in a matter of days.

When I did my analysis, I was looking at a $120K house, and as I said, ~$1000 rent. That house fell through and I stepped up to a little nicer house for $137K, which isn't in my analysis but probably worked well similarly.

It looks like you'd pay 4x that for a house, but only 2.7x for rent. And a year less to recoup closing costs. I'd guess the full numbers would tilt towards renting. Though as you noted, Westlake doesn't have much more room to build houses, and anything new would be much more, so the appreciation might hold. Or not.

I don't regret buying but for your case if you like the rental place well enough, I'd probably go with that.

 

[Looking4Ward]

When I did my analysis, I was looking at a $120K house, and as I said, ~$1000 rent. That house fell through and I stepped up to a little nicer house for $137K, which isn't in my analysis but probably worked well similarly.

It looks like you'd pay 4x that for a house, but only 2.7x for rent. And a year less to recoup closing costs. I'd guess the full numbers would tilt towards renting. Though as you noted, Westlake doesn't have much more room to build houses, and anything new would be much more, so the appreciation might hold. Or not.

I don't regret buying but for your case if you like the rental place well enough, I'd probably go with that.

I'm struggling with what a $500K home should rent for from an owner's perspective. This market is really intriguing to me in it's current state.

 

[haha]

I would say the key factor here is that you can pretty well know what your results will be if you rent. Homeownership entails risk. So even if the ownership option might pencil out a bit better, it is much more variable. Basically a bad idea.

Ha

 

[HillCountry]

I'm struggling with what a $500K home should rent for from an owner's perspective. This market is really intriguing to me in it's current state.

The house I own here appraised at $800k; the rent is only $3400. How’s the number working? It was purchased 7 years ago at $400k.

 

[FREE866]

Based on the numbers the OP presented the answer is "hell no" from an investment standpoint. One of the biggest myths out there is that home buying is a "great investment". They aren't liquid, require constant cash investments along the way, and historically you'd do much much better taking that money and putting it into the stock market. As a place to live, experience nice memories, etc sure, but strictly from an investment standpoint the numbers don't add up.

 

[NYEXPAT]

I'm struggling with what a $500K home should rent for from an owner's perspective. This market is really intriguing to me in it's current state.

I always heard 1/2 of 1% per month, so this seems to be in the ballpark.

 

[Another Reader]

I always heard 1/2 of 1% per month, so this seems to be in the ballpark.

Rule of thumb is 1 percent per month for a rental to be profitable. Here in Silly Valley, a $2M house rents for $5,000 to $6,500 a month. Buyers are often from Asia and think about real estate in terms of generational wealth, not current cash flow.

OP lives in a similar market where ownership demand from well compensated tech employees outstrips supply. Employment growth and low interest rates fuel higher prices.

The boom is not going to last forever. At some point the music stops and homeowners scramble for the chairs. What were these houses in Westlake selling for in 2009? Even here in the Bay Area, prices do go down.

If OP knows he is gone in five years, renting probably makes more sense.