Does a home purchase even make sense?

[Looking4Ward]

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.

In most cases less than half of what they are selling for now.

 

[COcheesehead]

I’ll throw out an intangible....
The house we are about to buy would be hard to find as a rental.
Quality of life, pride of ownership, where it is, building a nest, who your neighbors are, bonding with your neighbors ..all come into play.
As I mentioned in other threads, sometimes decisions are not always about maximizing your return, but about getting what you want.

 

[RunningBum]

I’ll throw out an intangible....
The house we are about to buy would be hard to find as a rental.
Quality of life, pride of ownership, where it is, building a nest, who your neighbors are, bonding with your neighbors ..all come into play.
As I mentioned in other threads, sometimes decisions are not always about maximizing your return, but about getting what you want.

That was the kicker for me. I found a house I really liked, and still liked after the 5 years were up. I was not finding a rental I liked. All a combination of area, floor plan, condition, etc. The only thing I really did to the house was add some landscaping to hide an ugly fence and give a little more privacy, and I enjoyed doing that.

 

[brucethebroker]

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

I think you are spot on.

 

[HadEnuff]

I’ll throw out an intangible....
The house we are about to buy would be hard to find as a rental.
Quality of life, pride of ownership, where it is, building a nest, who your neighbors are, bonding with your neighbors ..all come into play.
As I mentioned in other threads, sometimes decisions are not always about maximizing your return, but about getting what you want.

Very good point, but I think it doesn't apply in OP's scenario. OP expressly states he/she is out of town once DS graduates from high school.

I would be very hesitant to tie up that much money in a home that may be on the tail end of a bubble, knowing i want to sell in 4 years. OTOH, the risk that OP runs is the possibility that the house may become unavailable after the current lease runs out.
Everything comes with some risk.

 

[COcheesehead]

Very good point, but I think it doesn't apply in OP's scenario. OP expressly states he/she is out of town once DS graduates from high school.

I would be very hesitant to tie up that much money in a home that may be on the tail end of a bubble, knowing i want to sell in 4 years. OTOH, the risk that OP runs is the possibility that the house may become unavailable after the current lease runs out.
Everything comes with some risk.

I agree, for the OP it may not work. I was sharing a personal experience. Having just lived the rental life for a year as we are between houses, it made me appreciate other things of home ownership that you don’t think about. Mainly caring for and about your living space and also your relationship to your neighbors. When things are temporary you tend to not put any effort into these types of things. Just one of many life lessons you learn along the way.

 

[Nick12]

Living in a house for just 4-5 years - rent instead of own. In my area in Florida, the owners take more pride in maintaining their property. The renters though, that's another topic for discussion.

 

[Looking4Ward]

A lot of good points made. I actually prefer owning, in fact this is the first time in my life I've rented a home. But I'm discovering the nuances between owning a home with a mortgage while working versus owning a home without a mortgage when retired.

As I work thru the process I'm experiencing first hand the challenges of attempting to secure a mortgage with no earned income, estimating the loss of investment returns when tying up substantial retirement funds in a home, comparing the cost to pay someone else to live in their home rather than own it myself, and quantifying the intangible benefits of owning an asset instead of borrowing it.

I'll still face this same dilemma in four years when DS graduates high school. I'll be able to escape a HCOL area for one with more reasonable housing costs but the decision to buy a home utilizing a substantial amount of investment capital versus renting will still be required.

Therefore I'm drawn to one clear conclusion. I should have kept a paid-for home before I retired.

 

[Music Lover]

I’ll throw out an intangible....
The house we are about to buy would be hard to find as a rental.
Quality of life, pride of ownership, where it is, building a nest, who your neighbors are, bonding with your neighbors ..all come into play.
As I mentioned in other threads, sometimes decisions are not always about maximizing your return, but about getting what you want.

Owning a home is as much or more a lifestyle choice rather than a financial decision, plus the people who buy vs. those who rent will have a different wish list regarding sq footage, location, yard size, etc., so a fair comparison can't always be made.

 

[Lakewood90712]

$8100 for property taxes? Yikes.

No State Income Tax. Pick your poison. You pay one way or another.

 

[COcheesehead]

No State Income Tax. Pick your poison. You pay one way or another.

That was my thought too. There is no free lunch.

 

[Huston55]

OP-

As noted earlier, based on the thread title & your comments, you seem to have already decided to continue renting. FWIW, I think that is clearly the best choice; using your numbers & assuming no appreciation/loss, even the NYT rent/buy calculator (which is somewhat ‘buy’ biased IMO) shows renting saving you >$50k.

So, financially, it’s not even close and, given that you’ll move in just a few years, finances ought to carry the most weight. I think this is even more important when I read your sig line:

ER'd 6/1/2014 @ age 53. AA=70/30, Initial WR=3.5% but now close to 7% until SS and lower expenses kick in.

What would your WR be if you used assets to make a 50% down payment? Not where you’d want to be I’m guessing.

If you’re not yet convinced to continue renting, read a bit of JLCollins.

https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

https://jlcollinsnh.com/2012/02/23/...me-opportunity-cost-and-running-some-numbers/

 

[Chapter 3]

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.

This went away for most with the new tax structure. In most parts of the country there is no tax advantage to own, particularly short-term.

 

[capjak]

That was my thought too. There is no free lunch.

Illinois Lake County real estate tax is 3% of assessed value plus income tax of 5% plus local sales tax 7% and the state is in financial trouble....

So for his 500,000 house in Chicago Suburbs it would be $15,000.

8,000 seems extremely cheap.

 

[COcheesehead]

Illinois Lake County real estate tax is 3% of assessed value plus income tax of 5% plus local sales tax 7% and the state is in financial trouble....

So for his 500,000 house in Chicago Suburbs it would be $15,000.

8,000 seems extremely cheap.

But you get the value add of the beauty of Illinois...

 

[ziggy29]

Unless the market is so out of whack that mortgage payments would be much lower than rent payments, unless I thought I was going to be somewhere for at least 7+ years , I would probably rent rather than buy.

And if the market were such that buying resulted in a much lower monthly payment than renting, I'd have to ask why.

 

[VungTau]

I was in a similiar situation during a stint in Northern Calif for the exact same reason - daughters education. I did a similar analysis and decided to rent too. I was financially better off and avoided the angst of buying and selling a home!

I quickly departed the area once her school was completed, took her on a 6 month world trip around southern Europe and Turkey. I bet if we had invested in a home a quick exit and life time memories together wouldn't have been possible...

 

[pb4uski]

.... One of the biggest myths out there is that home buying is a "great investment". .... As a place to live, experience nice memories, etc sure, but strictly from an investment standpoint the numbers don't add up.

Totally agree... it's a place to live. In the OPs case since his time horizon is so short, I would rent.

We've owned 4 properties during our adult lives. The first one we bought in a hot market and got close to a double in 2 1/2 years. The second one we broke even on. The third one we still own but is probbly break even at best and the fourth one is a modest gain.

 

[pb4uski]

.... 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.

But the HUGE difference is that the OP has a 4 year time horizon (will move in 4 years whether lease or buy) and you time horizon is much longer (we hope).

 

[NW-Bound]

+1

No reason to buy if you are going to live in it for only 4 years.