Author Topic: I'm ready to be a home-renter instead of home-owner  (Read 1785 times)

ohsnap

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I'm ready to be a home-renter instead of home-owner
« on: January 15, 2020, 11:08:49 AM »
We live in an almost-50 year old house so that might be part of the problem.  But in the last 3 years weíve had some pretty major expenses (these were all really necessary to replace old, damaged, and/or non-functional items):
1.   2019 - $8k to replace half the roof and replace/repaint damaged fascia.
2.   2018 - $4k new garage doors
3.   2017 - $15k new HVAC system

Of course there have also been plenty of random plumbing and electricity and appliance issues which havenít been individually significant but about another $1k/year.

We are hoping to relocate in the next couple of years and here are some numbers Iíve been looking at for housing in a sample city/neighborhood:
1.   Rent a 3br 2ba 1400 sq ft apartment/townhome for $1600 month.
2.   Buy a 3br 2ba 1700 sq ft house for $331,000.  Even with a 20% down payment, PITI would bet $2400/month (high property tax area).  Then you get all the maintenance and repairs on top of that.  Or you could also rent a house similar to this for $1800/month.
The rent advantage seems obvious in this scenario.  Plus with even just considering a 4% safe withdrawal rate on keeping the down payment instead of putting it in a house, thatís another $221/month in income that favors renting!

I have always thought ownership was better than renting.  But with the limitation on state & local tax deductions we wonít be itemizing in the future so thereís not tax benefit to owning.  Also Iím just overwhelmed at how much weíve had to spend in repairs on this particular house.  So what else am I missing?  Should we try renting for a while when we move?

BradminOxt19

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #1 on: January 15, 2020, 11:22:14 AM »
It really depends on where you are moving to, and the potential for RE to rise in that place.

In my case, I chose a LCOL place that had high potential to increase.  I bought a place for around $300k 15 years ago, and it's now increased to around $450k.  I've put in $12k in AC, $9k in improvements plus the usual landscaping etc.  So aside from mortgage interest, my investment has been $321k.  If I were to sell right now, I would have a capital gain of $129k.

My monthly payments were around $1k, total cash flow into living was around $240k ($180k monthly cash plus $60k down payment), with equity in my house about $150k, I should get back around $279k (minus commissions), or roughly 20k back in cash net (after subtracting maintenance / repair, etc), not taking into account time value of money.

I have a friend who has been renting this entire time. Initially rent was around $700, steadily rising to around $1.1k, and will go up to $1.3k this year.  Averaging rent out to $900, for 15 years, his out of pocket is $162k, for a much smaller place than mine, with only a carport (where someone stole his vehicle last year since it was out in the open). 

So to compare side by side, my total cash out of pocket is around $20k positive, whereas my friend is $162k negative with no asset to show for all that spend, it's pretty clear home ownership is the way to go in my area.

To top it off, I refinanced to a very low rate in 2012, and took about another $80k of equity out of my house and put it to work in the stock market.  That money has roughly doubled, earning me a further $80k in capital gains.

So to sum it up, in most places where real estate is expected to match inflation or go up even more, you're probably better off being home owner.  Only in really destitute places or special circumstances does it make sense to rent long term.  Renting is paying someone else's mortgage and cost of repairs, maintenance, taxes, etc., with the only benefit being you can leave the property more easily than a homeowner.  There's really no getting around the match.

One other thing to mention is my friend is facing annual rent increases of 5-10% as this area is going up in popularity with more people moving in.  My mortgage is fixed and cannot go up (plus the value of my house keeps going up as well due to lack of supply).  The monthly cost of $1k is permanently fixed whereas my friend is looking at monthly rent increases with each renewal of rent.  If more people were like my friend, I'd be a huge landlord and have tenants pay my mortgage for me. 

This is why the majority of millionaires have made their money via real estate.  It's easy to leverage capital for slow growth with no special skills or talent or family connection needed.  Anyone can become rich via real estate, it's the most equal opportunity in pretty much all of America, compared to other industries / businesses.

Home ownership far outweighs renting in most cases, in my analysis.
« Last Edit: January 15, 2020, 11:32:45 AM by BradminOxt19 »

SunnyDays

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #2 on: January 15, 2020, 11:23:06 AM »
Sure, you could try renting.  Why not?  Just keep in mind that landlords don't always fix things that need it because it costs money, as you've found out.  You will also be limited in how much you can personalize the house, such as painting.  The rental houses around here are pretty easily identifiable due to their condition, because, as a rule, renters don't take care of their property as well as an owner, then the landlord doesn't bother to repair and the downward spiral begins.  It might be different in more upscale neighbourhoods, but where I live, a 300K house is pretty average.

ohsnap

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #3 on: January 15, 2020, 12:33:16 PM »
Thanks for the thoughts.

SunnyDays, yes, when we've been renters we've had mixed experiences with how much we can expect the landlord to do.

Bradmin, I'm glad you've had good luck with your current house.  I did consider possible real estate appreciation, but...we've had gains in real estate before, and also suffered a big loss.  So I'm hesitant to bank on that.

BradminOxt19

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #4 on: January 15, 2020, 12:51:21 PM »
Thanks for the thoughts.

SunnyDays, yes, when we've been renters we've had mixed experiences with how much we can expect the landlord to do.

Bradmin, I'm glad you've had good luck with your current house.  I did consider possible real estate appreciation, but...we've had gains in real estate before, and also suffered a big loss.  So I'm hesitant to bank on that.
The thing is you don't have to sell during recession.  Rent it out and have rentors help with mortgage, and then sell when price is high again.

That's my relatives did.  Upgraded to a better house in 2013, old house wasn't worth what they paid.  They were patient and rented it out.  Now their new home, and their old home have gone up 60% in value.  They are selling the old home now to pay off the new home.  It's amazing how well timing the sale has worked for them.  And the renters have nearly paid off the old house with the rent income.  Triple win win.

Only losers are the renters, who couldn't afford to buy a house when prices were low, now rents keep rising and they'll have to find a new place to live, while having helped to pay off my relative's mortgage for 6 years.

Mathematically you'd have to really find special circumstances to come out ahead renting vs owning, or awful timing in your buy high sell low situations.
« Last Edit: January 15, 2020, 02:01:18 PM by BradminOxt19 »

MilesTeg

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #5 on: January 15, 2020, 01:59:33 PM »

I have always thought ownership was better than renting.  But with the limitation on state & local tax deductions we wonít be itemizing in the future so thereís not tax benefit to owning.  Also Iím just overwhelmed at how much weíve had to spend in repairs on this particular house.  So what else am I missing?  Should we try renting for a while when we move?

Rent vs buy is very location dependent.

Where we are you can buy a 5 bdrm, 3 bath, 2500sft home with 0% down for less than renting a 2bdrm, 750sqft apartment one block over. After considering all costs, taxes, deductions, etc.

McStache

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #6 on: January 15, 2020, 03:43:00 PM »
It's both very location and timeline dependent.  Take a look at the NY Times rent vs buy calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html).

For where I am location wise and timeline wise, renting is a far better deal, but I bet in the future that equation will change and owning will be better.  It all depends.

Bernard

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #7 on: January 15, 2020, 03:52:48 PM »
Quote
Rent vs buy is very location dependent.

Where we are you can buy a 5 bdrm, 3 bath, 2500sft home with 0% down for less than renting a 2bdrm, 750sqft apartment one block over. After considering all costs, taxes, deductions, etc.

Word.
Where we are you cannot rent any houses. Well, there are sometimes houses to rent, but you'd be in line with a ton of folks willing to throw their first born into the mix to get an advantage. And, rent would cost the same as a mortgage.

But if your location and market warrants renting, that might be a viable option, although I personally like the idea of eventually owning your forever home outright when you retire.

diapasoun

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #8 on: January 15, 2020, 04:00:10 PM »
It's both very location and timeline dependent.  Take a look at the NY Times rent vs buy calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html).

For where I am location wise and timeline wise, renting is a far better deal, but I bet in the future that equation will change and owning will be better.  It all depends.

I was also about to suggest this calculator. It is very, very helpful.

Simpli-Fi

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #9 on: January 15, 2020, 05:44:42 PM »
I began renting after being an owner for 10 years and actually feel more settled as there are never home improvement projects.  Freedom to relocate was a blessing.  There are things I miss...but also as a land lord myself; I'm not in a rush for home ownership again until I'm ready to pull the plug on corporate America, which is dictating where I live at the moment.

partgypsy

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #10 on: January 15, 2020, 06:02:17 PM »
I feel you. It was my dream for so long to have my own, paid for home. Now that I'm divorced and don't have someone to share it (and help keep it up!) I'm not so personally attached to it anymore.  And it seems every year for the last few years have been huge house expenses (with at least 1 more to go; need to replace the main stack under house).

 I am lucky that I bought when property was cheap so my mortgage is less than me renting an equivalent place. And my kids don't want me to sell it because it was their childhood home.  So, I don't know, after my kids grow up and move out, I guess I will decide then.
« Last Edit: January 15, 2020, 06:06:40 PM by partgypsy »

BradminOxt19

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #11 on: January 15, 2020, 06:58:34 PM »
It's both very location and timeline dependent.  Take a look at the NY Times rent vs buy calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html).

For where I am location wise and timeline wise, renting is a far better deal, but I bet in the future that equation will change and owning will be better.  It all depends.
That calculator is pretty nice, but it misses on one key benefit for home ownership.  That is the tax-free gain on house sale profit of $250k per person or $500k per couple income exclusion.  I've used it once, to have a totally tax free gain of $100k on a prior house.  I'll probably use it again on the house we live in as we downsize after kids move out.

There is no other sweeter way to make money than to make it completely tax free, legally.  I saved $20-$30k taxes on that $100k gain on the previous house.  I'll probably save another $35k - $45k on taxes on the sale of the current house I'm in.  You can't beat that with a stick.

Again, as a renter, your landlord still has bills to pay, and it gets passed on to you in the form of rent.  Short term it might be feasible to have cheaper rent than mortgage + taxes, but long term it probably won't.  To me it's a pretty clear choice of renting vs buying, in most areas where jobs and people are increasing.
« Last Edit: January 15, 2020, 07:03:45 PM by BradminOxt19 »

nereo

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #12 on: January 16, 2020, 09:51:31 AM »
It's both very location and timeline dependent.  Take a look at the NY Times rent vs buy calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html).

For where I am location wise and timeline wise, renting is a far better deal, but I bet in the future that equation will change and owning will be better.  It all depends.
That calculator is pretty nice, but it misses on one key benefit for home ownership.  That is the tax-free gain on house sale profit of $250k per person or $500k per couple income exclusion.  I've used it once, to have a totally tax free gain of $100k on a prior house.  I'll probably use it again on the house we live in as we downsize after kids move out.

Actually, the calculator linked above accounts for the exclusion.  It calculates opportunity cost and taxes based on LTCG at your marginal tax rate, and you can adjust home appreciation as a percentage ("home price growth rate") as well as anticipated investment returns. Proceeds from sale (appreciation) are treated as tax free by the calculator (i.e. not reduced by your marginal tax rate).

sui generis

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #13 on: January 16, 2020, 10:06:09 AM »
I've been both a renter and an owner.  After owning I was so happy to rent and not have the obligation of maintenance.  After renting a while, I missed being able to make a place my own.  Painting and decorating does a certain amount, but I'd kinda like to change fixtures and stuff in our bathroom.  Luckily, I'm not *that* into interior design, so it's a passing feeling.  But, clearly, there are pros and cons to both.  Financially, where I live, it's much better to rent.  I'd be paying at least $1000 more on a mortgage than I am for the garden cottage I am currently renting.  And an added distinction: for a place I'm actually *willing to buy*?  $2000 per month more (not counting property taxes!)

And I think that's a distinction that hasn't been made.  Or maybe I'm unusual in this respect.  But if I'm gonna buy something, I want it to be nicer than what I rent.  Whether that means upfront cost or investments in renovations.  Like, so few places where I live have two bathrooms.  Even sometimes for a 3 or 4 bedroom home!  I still would like to have two bathrooms, and I do have a weird second toilet in the attic/unfinished space adjoining the spare room.  But if I bought?  I really don't want to make a long-term commitment to a place with only one bathroom.  So, I can't even compare the cost of renting the place I live to owning it, since I would not want to own it.  It's perfectly serviceable and comfortable and the landlord is excellent with maintenance and any concerns we have (as have all my landlords).  The kitchen is better than the last place we rented and we now have a vegetable garden, but we no longer have a view of the Golden Gate Bridge like the last place we rented where we watched sunsets over the bridge with a cocktail on the regular.  But by renting, I guess we got to experience all of those things.  And to have all of those things in a place I owned?  Well, let's just say I wouldn't be FIREd if I owned a place that did, since it would be at least a couple million dollars.

ohsnap

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #14 on: January 16, 2020, 05:05:37 PM »
It's both very location and timeline dependent.  Take a look at the NY Times rent vs buy calculator (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html).

For where I am location wise and timeline wise, renting is a far better deal, but I bet in the future that equation will change and owning will be better.  It all depends.

Thanks for the calculator.
Yes, the equation is very location dependent.  In the area that I was looking at, it definitely makes sense to rent from a near or mid-term cash flow perspective.  But if I look at 10 years down the road - who know how much appreciation I might have missed out on? 

Rdy2Fire

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #15 on: January 19, 2020, 02:17:58 PM »
I think about this EVERY SINGLE DAY. Home owner for 19 years, house is 47-48 years old, have done tons of work and there is always more.

I do like where I live but it's a HCOL area, high taxes and the value of my home based on when I purchased it vs what I have put in and what I need to still do (prior to selling) would mean I'd probably lose money in regards to what I paid and put in vs selling. Obviously that is not counting tax benefits over the years etc.

If I want to stay in my area then it would make no sense to sell due to rental costs but consider moving all the time. Huge decision I feel like I need to make in the next year. I'll keep following this one for sure as it's always great to get other peoples perspectives

trollwithamustache

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #16 on: January 19, 2020, 02:32:01 PM »
Responsible renting is underrated... At peak kid we needed 4 bedrooms. Ok fine, kids could share, did we really need?, well, there was a lot of happiness with a 1 kid to bedroom ratio.

there are a lot of ramp up years before and after where we only needed 2 or 3 bedrooms. Now that we are ramping down, rent is ramping down big time.

This does't work for the the home workshop guys, but my hobby is a boat that sits at a marina. So, while we have a bit of stuff, its all moveable.

John Galt incarnate!

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #17 on: January 19, 2020, 02:48:28 PM »
It was my dream for so long to have my own, paid for home.



For a long time I wanted a home that was a magnificent architectural masterpiece.

It would have been a clown house; there's no doubt about it.

Did I need it?

Of course not so  I bought a smaller house located on rural acreage in  the beautiful mountains.

  How happy I am that I did!

Renting is not for me because as  a FIREee I insist on  the security and control of a paid-for home.

1. No one can raise the rent.

2. No one can tell me I have to move because the property has been sold.

3. The landscaping/painting/interior design is of my choosing.
« Last Edit: January 19, 2020, 02:53:20 PM by John Galt incarnate! »

Malkynn

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #18 on: January 19, 2020, 04:47:21 PM »
I would go back to renting in a second if it made sense where I live, but instead I do the next best thing of owning a condo in a high-rise, so it's like half renting because I have to take care of very very little.

Rent vs buy is a financial question, but more importantly it's a major lifestyle question. The kind of people who really want to own feel a drive to do so that is largely internal. On the financial side, they find ways to make it make sense, and tend to naturally gravitate towards areas that appeal to the owner types, so renting usually isn't a great option where they want to live anyway.

Note, I'm not at all criticizing those who care about owning, the lifestyle impacts of owning vs renting are very real and important to consider.

How and where you live is a huge cornerstone of the happy life equation, so look at your options with a critical eye and decide which works best for you.

GoCubsGo

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #19 on: January 20, 2020, 09:05:23 AM »
Yeah, I'd agree with Malkynn that sometimes the question comes down to an innate drive to own.  I have a ton of equity in my home and my initial plan was to sell in retirement and rent in my area to keep family roots (and rent somewhere warmer in the winter).  After thinking about it a couple years I just can't do it (even if it makes more financial sense).  My plan now is to gut rehab a smaller home and make it gorgeous.   I've been a landlord since my 20's and I just can't get past someone else potentially controlling my living situation.

I don't think there's a right or wrong answer.  If owning my own home means I travel less or drive a less fancy car then it's basically like any other cost/benefit decision MMMers make every day.

Dicey

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #20 on: January 20, 2020, 11:30:53 AM »
For us, it's all about control. We're not terribly interested in giving that up.

Classic example: Our rentals are all in a luxury Senior Community. We currently have a vacancy. The new renters were perfectly happy renting when they moved here from out of state. That is, until their landlord decided she was ready to move into the house herself. Now, they're stuck pulling up stakes again. They're asking for a five-year lease. Sure, we'll give it to them, with automatic rent increases baked into the contract.

Igelfreundin

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Re: I'm ready to be a home-renter instead of home-owner
« Reply #21 on: January 20, 2020, 01:38:04 PM »
I love using calculators, but they don't take into account the intangibles. Do you want the freedom of being able to move to a different neighborhood or city? Do you love being able to paint or customize your house? Do you value your own yard? I love owning right now because I garden and enjoy learning to do repairs myself. But I really only need a one bedroom house (and they don't come that small). I had to buy more house then I needed. It only makes financial sense because I have a roommate. Someday I'll sell, start renting, and then I can quit worrying if the roof will make it another few years.

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