Plan to rent or own a home?

[BigNick]

We bought our home with a 15 mile commute in 1993 when the children were small, then sold in 2007 and moved into town where we now rent a 4-bed house with yard, garage, etc for 1550/month. Comparable homes would sell for 400K easily.

When we FIRE we may or may not move from this place straight away. We like our present home but we will realistically never have the chance to buy it (landlord's childhood home, sentimental value etc) and also it's probably more than we would need, or want to tie up in capital - neither I nor DW are big "ideal home" people.

Now, I'm thinking in general terms about whether we should plan to rent or buy. When we FIRE - hopefully in as little as 2-3 years - I expect that we will have about 3000/mo in pensions and a 4% withdrawal from a 1.2M portfolio, say another 4000/mo. That pretty much matches up with our current expenditure (LBYM: we save 5000/mo and are also putting 1500/mo aside for college, which will end in 2-3 years)

The raw numbers are easy: 1550/mo takes up 4% of 465K from the portfolio. So in theory a house or apartment which costs 250K leaves 215K more in the pot, giving another 715/mo to spend on [-]slippers[/-] [-]hearing aids[/-] travel and fine dining. We'd need to add something for maintenance, but I'm guessing that that is comparable in magnitude to the ongoing annual increases in the rental amount.

What else should we take into account? Experiences welcome.

 

[FIREd]

Personally, I plan to own a low-maintenance home in retirement. Aside from the traditional rent vs. own arguments (mobility vs. stability for example), I also try to look at future liabilities when making such choice. If you rent, then you introduce a large inflationary expense in your budget. If you own, maintenance, taxes and insurance are also inflationary, but they tend to represent only a fraction of the rent you would pay.

For example, if we rented our house, we would pay about $1,200 per month (based on neighborhood comps). That's an annual expense of $14,400, fully adjustable for inflation. Owning our house outright, however, costs us about $4,700 a year including property taxes, insurance and maintenance costs. Those costs are also subject to inflation, but since they are much smaller than rent payments, they introduce much less inflationary pressure in our budget (which is good news given that other items in our budgets are highly inflationary and we don't need to add fuel to the fire).

Plus, your 465K capital might become exhausted after 30 years (at 4%), right when you may need to move to an expensive assisted living facility. If you rented for 30 years, you are left with nothing. If you owned, you can always resell or rent the house and free up some capital which will help you defray the costs of the facility (that's what my grand parents did and what my parents plan to do).

Lastly, if you rent and then one day you decide you might want to own, you might find yourself priced out of the market. When you own, you always have the choice to sell, get some capital back and go rent something.

 

[W2R]

We bought our home with a 15 mile commute in 1993 when the children were small, then sold in 2007 and moved into town where we now rent a 4-bed house with yard, garage, etc for 1550/month. Comparable homes would sell for 400K easily.

When we FIRE we may or may not move from this place straight away. We like our present home but we will realistically never have the chance to buy it (landlord's childhood home, sentimental value etc) and also it's probably more than we would need, or want to tie up in capital - neither I nor DW are big "ideal home" people.

Now, I'm thinking in general terms about whether we should plan to rent or buy. When we FIRE - hopefully in as little as 2-3 years - I expect that we will have about 3000/mo in pensions and a 4% withdrawal from a 1.2M portfolio, say another 4000/mo. That pretty much matches up with our current expenditure (LBYM: we save 5000/mo and are also putting 1500/mo aside for college, which will end in 2-3 years)

The raw numbers are easy: 1550/mo takes up 4% of 465K from the portfolio. So in theory a house or apartment which costs 250K leaves 215K more in the pot, giving another 715/mo to spend on [-]slippers[/-] [-]hearing aids[/-] travel and fine dining. We'd need to add something for maintenance, but I'm guessing that that is comparable in magnitude to the ongoing annual increases in the rental amount.

What else should we take into account? Experiences welcome.

In 2-3 years when you retire, your housing needs will be different than they are today and you may decide that you want to move. Depending on the housing market at your location, buying a home may entail some serious liquidity constraints - - houses are hardly selling at all in some communities. Moving might be considerably easier if you don't have to sell a house in order to do it.

 

[FUEGO]

Just a rough ballpark calc from my point of view. You stated $400k houses rent for $1550/mo in your neck of the woods. Don't underestimate the cost of maintenance, taxes and insurance. And HOA dues if applicable. Let's just say 1% for maintenance, 1% for taxes and 0.3% for insurance. This works out to $9200 a year for a $400k house. Or $767 a month. Half of your rent would go to pay the taxes, insurance, and maintenance if you owned free and clear.

But there is the qualitative side to owning a house. And the stability and tax-free status of imputed rental income.

 

[BigNick]

Just a rough ballpark calc from my point of view. You stated $400k houses rent for $1550/mo in your neck of the woods. Don't underestimate the cost of maintenance, taxes and insurance. And HOA dues if applicable. Let's just say 1% for maintenance, 1% for taxes and 0.3% for insurance. This works out to $9200 a year for a $400k house. Or $767 a month. Half of your rent would go to pay the taxes, insurance, and maintenance if you owned free and clear.

Yes - on the one hand 1500/mo is quite a lot of money in absolute terms to be paying in rent in this part of the world; on the other, we know that our landlord is not in this for every penny he could get (the upside of the "sentimental value" aspect of the house). When we moved in, 4 years ago, everything had been refurbished and we are very comfortable.

 

[kcowan]

Our rental cost $2500/mo in 1997 when we moved in and now it is $3170/mo. So in 13 years, it has increased by $670/mo. So I think we have had an average increase of just over 1.8% a year, although it was actually zero for a few years then really big and now zero again.

That includes power (heating) and water but not telephone, TV and internet. Of course maintenance fees are zero, and they did completely refurbish the place with new floors, cupboards, counters, lighting fixtures, sinks, faucets, plumbing and appliances.

 

[Pete]

I've seen a lot of $40K houses in my travels through the midwest this year. My sister in law bought a pretty nice 3br/2ba outside Independance Kansas for $12k. Can't beat buying something like that. All depends on where you want to live.

http://finance.yahoo.com/news/Newhome-sales-plunge-33-pct-apf-1236863702.html?x=0