Rent Vs Buy example
So right now my fiance and I are looking to rent a house. We plan on staying up here for about another 4.5 years for sure, then after that who knows.
So right now we are looking at this place
Haack Brothers Homes
They are duplex style townhouses. $340K now we don't have much saved, say $20k for this example.
Now 2 of these places are up for rest at $1400 per month.
Is there any possible way it makes sense to buy one of these. I can't figure it out.
My big this is that the everyone says you get to deduct interest. Which doesnt help much. I figure that loan would at 7.5%. So in a year youd pay like 25k in interest. And normally you get 10k deduction married so you only save taxes on 15K in interest, which at most would be 5k.
So is it all appreciation that people are banking on??????????????
So right now we are looking at this place
Haack Brothers Homes
They are duplex style townhouses. $340K now we don't have much saved, say $20k for this example.
Now 2 of these places are up for rest at $1400 per month.
Is there any possible way it makes sense to buy one of these. I can't figure it out.
My big this is that the everyone says you get to deduct interest. Which doesnt help much. I figure that loan would at 7.5%. So in a year youd pay like 25k in interest. And normally you get 10k deduction married so you only save taxes on 15K in interest, which at most would be 5k.
So is it all appreciation that people are banking on??????????????
Comments
I haven't done the math in your case (you could use NYT Rent vs. Buy Calculator to do the analysis).
I think there's a certain break point where it doesn't make much sense to get into a mortgage, because once you've paid it off you're nearing the age where people either die or move to assisted living, so you get minimal benefit out of having paid your house off.
To be valid, those calculations should count 30 years for owning, and compare against a lifetime of renting, in which case owning is always better.
P.S. - I currently rent.
First you have to make a guess about where you think the housing market is headed in the next few years. After that I think it depends a lot on what you do with your savings if you do decide to rent.
But isn't that only true if you plan to live in the house for the rest of your life. I would guess that most homeowners do not plan to live in a house for the rest of their life, or even through the entire life of the mortgage. In that case, the rent vs. buy comparisons with a timeline of 30 years would be valid, no?
Never say never :-) (and never say always). When the difference between renting and buying is big enough, then after 30 years you will have so much money saved by renting, then it will easily cover all your rent expenses going forward. Of course there are many variables that come into play here, but saying that owning is always better is not true.
Best regards,
Lukasz
7702 28th Ave NW 459,000 460,000
7317 Earl Ave NW 700,000 705,000
7558 28th Ave NW 499,950 526,000
7537 33rd Ave NW 749,000 760,000
1917 NW 73rd St 450,000 482,000
7509 Earl Ave NW 489,950 490,000
8021 22nd Ave NW 699,950 515,000
7025 25th Ave NW 675,000 675,000
7529 17th Ave NW 489,950 480,000
Not necessarily, although that is my plan being a relatively simple guy.
Even if you live in a house for x years and sell, you'd have x years of equity built up, so you wouldn't be getting into another 30 year loan. It gets progressively less expensive, unless you upgrade too much.
So if I've got 10 years of equity built up, I go into a shorter loan, depending on the cost of a new house. To say nothing of the fact that most people downsize as they get older, so owning actually gets cheaper due to the equity built up in previous decades. So I don't have to live in a house for the full length of the loan, because I've been building equity for the whole time.
Solid observation, but I'm not sure I 100% agree. I think that we;re both depending on intuitive models and it's hard to get a grip on the numbers. So I'm going to use some quick calculations to see which way it comes out.
Assume that one person paid $2500/month in mortgage for 30 years, and the other paid $1500/month in rent for 55 years. The totals come out $90k in favor of renting. This is just a crude calculation and doesn't take much into account. But the gist is, renting is better, but you have to live long enough.
Bear in mind also that this simple model misses the mark in that the cost of renting can go up over time, while the mortgage would be fixed. I should've indexed it to inflation, but I'm quite lazy.
[/quote]
"Shiller's Case-Shiller house price indices show US house prices moved in line with rents for years. Then they exploded. During the past 10 years they have increased 182 per cent, while rents barely moved. Why?"
http://www.ft.com/cms/s/4c93a12a-f991-1 ... 10621.html
Now its 8 have sold, 2 rented, 2 for sale and they are trying to rent out the 2 for sale at the same time.
People who buy now could be betting on appreciation but they could also be betting on the fact that housing may be fairly valued and rents may be undervalued. Over the past few years rents have been increasing significantly, much higher than the average increase in income. I know there will always be a few people who say "Well my rent hasn't gone up in 5 years...renting is so much smarter" etc etc etc. But I think most rational people would agree that rents as an average have gone up significantly in the recent past (I know most of this could just be the evil pro-home ownership media that always highlights these stories or the even more evil Realtors who blog about it). I have a buddy whose rents have gone up nearly 40% in the last 4 years in his complex. Granted, this is just one example but I've talked to many other people at work who are experiencing the same thing.
So my point in all of this is that many people may be fine for the most part locking in a fixed payment every month through buying rather than being at the demands of the rental market. But, if you're going to be there less than 5 years you should probably think twice about buying. You also have to keep in mind that you'll lose about 8-10% of the value of your home just through the transaction costs/taxes when you sell. Your appreciation over the 5 years would have to at the very least cover this or you'll be taking a bath.
Ownership also has other non-financial benefits as well. I don't know if you have a family or not but it may be nice to know that you'll never have to be forced to move over the next 5 years (unless of course you take on a loan you can't afford).
I absolutely agree. Sadly, I cannot afford a house in this market without taking out a loan that I cannot afford. I hate renting. I owned my own residence for nine years before moving here. Still, the idea of going bankrupt from housing appeals to me even less than renting.
Or lose your job, or get a divorce, or big medical bills, or... There are most definitely non-financial benefits to owning a home, but let's not pretend that once you are in a home you are somehow safe from losing it. On the flip side, I've rented for over 10 years and never been forced to move. It's always been by choice. Sure, I could be forced to move in the future, but owners can also be forced to sell, even of they have a loan they can afford.
Agreed. Imminent Domain means you may be kicked out of your own home if it's convenient for the government. True, people are evicted for no fault of their own more often than their house is seized via imminent domain, but I'm tired enough of statements like these that I thought I'd give you a bad time. Frankly, the media has been shoving the advantages (real or otherwise) of homeownership down people's throats for about 4 years now. We don't really need 'new insight' into the same 'facts'.
But most of those things would also likely cause you to lose your rental home. Part of not taking on a mortgage that you cannot afford is that you should be able to accumulate some decent savings to shield you from the risk of these adverse events coming up and losing your home. I'm not trying to say that once you purchase a home you are forever saved from the risk of losing it. What I am saying is that you remove the risk of a landlord dictating when you may have to move.
You're fortunate that you've been able to stay in your same place for over 10 years. But it's also important to remember that all of those events you listed above can also happen to the landlord and lead him to put your rental home on the market and you out of a home. I've known several people who have rented homes and then some unforeseen event happens with the landlord and he needs to sell the place and the family renting it is stuck looking for a new place. THis is especially painful when there are kids (especially kids in school) involved.
I'm not saying that home ownership makes you immune from the risk of losing your home, but a responsible homeowner will also be saving enough every month to mitigate this risk.
Oh geez, another reference to the evil media shoving the benefits of home ownership down our throats. Couldn't you have included something about sinister Realtors as well?
sorry, pet peeve
Yes, their are ways to insure your using the correct words!
that's twice today you have cracked me up!
my bad.
My point is that we've probably covered every possible pro/con for rent/buy on this blog approximately 10,000 times. Even though the media tends to focus on positives of buying (it's more profitable for them to do so), it's all been covered. But you seem confused, so here's what a balanced statement looks like.
Ownership offers more stability. This means more reliable expectations about the future state of your living arrangements. But it also limits ones ability to pick up and move when the time is right. Both sides of the coin have benefits.
Was that so hard? Naming yourself MrRational doesn't mean that you can make one-sided statements and that everyone else should just nod their head and agree. If that worked, I'd legally change my name to MrGod.
Did I ever ask everyone else to just nod their head and agree? All I said to the original poster was that ownership does have non-financial benefits and then went on to discuss one of them. What is so complicated about that? Do you notice that my name is not "MrFairandBalanced"?
I agree completely with the financial argument of renting over buying. You will become richer over the course of your life through renting as opposed to buying, no doubt about it. But that doesn't always make renting the better decision. We're not supposed to be thinking of housing as an investment, right? The reason why I personally lean towards ownership is for the non-financial benefits that I am willing to pay a premium for.
I don't think that is always true in every location. I think it is definately true in the Puget Sound today. It has probably not always been the case here. It is probably not the case today in some places in the US. There will probably be a time in the future when it is not true here.
The fact that one could rent the same house for much less than of the cost of owning a similar house, even with a 20% down payment shows a huge disconnect (yes, been debated before).
From what I've seen on craigslist, one can rent a 2000+ sq ft 4bd/2ba home in Bellevue for $1750/mo. To buy the same/similar house, one would pay about $525,000. Including a 20% down-payment, the mortgage, taxes and insurance would be about $1200/mo more than renting.
Talk about putting a price on status, "security", and being able to paint your walls without asking!
I won't look to buy until the rents rise and house prices fall more in-line with each other. Say, the monthly mortgage (with 10% down, on a fixed rate!), taxes and insurance are about equal to renting the comparable home.
Boston is slowly approaching that, with prices almost equal if you have 20% down.
I have never known anyone buying investment properties to rent using those requirements
FWIW - here's a good article to read before this conversation veers too far into the ridiculous (Renting is always better than buying? I guess I have to give back all the money I made on my last house then...)
http://en.wikipedia.org/wiki/Capitalization_rate
Reading it again, it is kind of hard to understand
The people I know who professionally own investment properties own single family homes, duplexes or commerial properties. They are always willing to buy lower, but look for at a minimum the costs to be covered within 1-3 years 5 if things go bad and they all have extensive zoning experience. After 5 years they are expecting a very positive return and after 15 they are buying another property with the cash flow to lower their profit and tax burden and increase their equity. Those numbers can fluctuate depending on the activity and tax status of the rest of their portfolio as well. I am sure condos and apartments have even more variables. The two I have asked about it don't do residential with over 8 units because there is too much risk per property for small to medium sized investors, and they only buy projects outright, no individual condos.
There are so many variables it is really hard to pin down a perfect ratio, and the risks for flippers or small investors with under 5 properties and limited equity are a whole different set of numbers. Buy a condo or a property with a HOA and you have even less control.
I don't know any flippers, so when I ask questions of people I know the responses generally have to do with leverage cash flow taxes and equity, not a mortgage cost to rental income ratio.