What is a good rent to buy ratio to look for? And if not good...always rent?

[MountainTown]

My wife and I have been a bit dismayed by the expectations in the MMM world vs what we are finding in the housing market we live in. Rental yields seem to run around 6% as far as I can tell. For example, $260,000 house in different hoods would probably run for about 1300 a month. Of course that varies on the 2bedroom vs 3 bedroom but basically I am finding that based on the neighborhood the rental yield runs the same.

We are wanting to move soon and deploy the $50k in cash we have. We are a little annoyed with how small our 900 sq foot house is(no garage), and we are hoping for a baby soon(no pregnancy yet) .

The problem is:

a.) WE have super cheap rent. Since I am a cheapskate...we have stayed here for awhile. It's in the most expensive neighborhood but we probably pay about $300 below rent(our landlord recently raised the rent after 4 years). In a month we will be up to 875.

b.) We -do- love our location. It's close to wife's work, I work from home mostly, and it's under a mountain. On top of that we are a mile from DT/river/everything.

c.) The obvious rental yields are not in our favor. I dunno if I am doing the math wrong..but every time I run the numbers in our area, it just seems financially to make more sense to rent. More examples of places we looked at

$300,000 in this hood would likely rent for $1500 a month(3 bed garage)
$300,000 in crappy area but brand new, about $1500 a month(3 bed garage)
$285,000 2 bed, bonus, 1 bath....rent for about $1300 a month(very nice neighborhood)
$240,000 3 bed, 1 bath, garage, less desirable neighborhood. Rents for maybe $1200 a month(not sure on this one)

So....I am getting a bit nervous sitting on the cash, considering a baby arrival, and just wanting to move. I think we may be just as happy renting but I hate to move again in a year. does it just plain more sense to rent in this case? I think We could rent a really nice place for about $1500 and maybe a perfectly adequate, but bigger place for $1300 a month. That puts a dent in our budget but is it better than overpaying on a house?
 
I feel we are pretty on the fence in the rent vs busy debate.

Other brief notes:

Combined retirement accounts/deferred compensation: $240,000
Cash: $55k in CD's for down payment some day soon
Cars: $10k(newer used, 1 beater)
Debts: 0
Credit scores: Excellent to Good.

NW: $305,000

Income after a couple recent raises: $120,000(point being that we haven't been making this income for too long)
Type of jobs: Stable, government so I don't expect any huge raises anytime soon.
Future plans: Baby possibly? I want to go back to school in 2-3 years for a Masters program(to become a Licensed Counselor)

Extra info:
We both have chronic medical conditions which each up our max FSA each year so please factor that in. That's at least $5000 that goes to health expenses every year. luckily we have decent insurance.

Taxes:

Super low as we max out all accounts bringing our tax advantage savings somewhere between $50k and $60k with matches and such.

Any thoughts appreciated. Request more information if needed. Thanks!

[Another Reader]

We have had this conversation.  There is no baby yet.  Nothing has changed.  It makes the most sense to continue to rent at this price.

Since you are planning on staying in this location, buying might make sense IF you bought the kind of property that would do well in a downturn and the payments were less than or the same as rent.  No condo's or small lot properties with shared alleys and garages.  Those are the first properties to drop in value when single family homes on separate lots become more affordable.  If the payments put you in a bind if you decided to go back to school, then continue to rent.

Stop picking at the house and focus on other things in life.  Eventually, the right opportunity will appear.  The market here is already starting to soften (more so in Southern California).  When the Coastal California markets drop, so does the migration to cheaper housing markets.  Your time will come.

[frugaliknowit]

No baby yet and CHEAP rent, leave it alone (for now)!

[joonifloofeefloo]

Agree with both above, and add: If you're frustrated with Current Space, change *it* not your location. 900 sq ft for two people is a LOT of room. We had five in less than that. 400-450 for two people is common and luxurious. You can easily fit a baby in it, too. So, if 900 feels too small, I would do stuff like:

*massive declutter; go minimalist
*once down to only necessities, rearrange it for flow, ease of movement, light, whatever qualities you love
*consider a change like: sleep in the livingroom and make the bedroom a really groovy den or massive storage closet ("garage")
*paint the interior very different colours from currently
*swap out cheap things like drapes, bedding, etc

Basically style/stage it as though you're selling. You may find that, like many doing this, you fall in love with it.

Bonuses:
By deleting stuff you don't want or need, you're super prepared for when you do move.
You're gifting a very generous landlord with an easy-to-show place that looks and feels great.
You activate your prioritizing, creativity, and skills for your future space to be just right from the get-go.

[jlcnuke]

If you move, will you buy your forever home or just a temporary one?

A $300k mortgage will run you ~$1,615/month ($1,415 PI plus around $200/month for taxes and insurance I'm estimating). So you'd start out about $100/month more expensive than renting. If you're sticking around, however, and assuming 2% inflation (affecting rent 100%, but only the taxes and insurance on the mortgage), 40 years later buying would have cost you $654,365 while renting would have cost you $1,087,235, a difference of $432,870. Additionally, at 2% inflation, rent becomes more expensive than that "more expensive" mortgage only 6 years later and by year 10 you've saved money overall by buying instead of renting.

Year                           Mortgage                        Rent              Difference   Net Difference     PI - Monthly     TI - Monthly  Annual Total     Annual Total      Annually    1    $1,415.00     $200.00     $19,380.00     $18,000.00     $(1,380.00)    $(1,380.00) 2    $1,415.00     $204.00     $19,428.00     $18,360.00     $(1,068.00)    $(2,448.00) 3    $1,415.00     $208.08     $19,476.96     $18,727.20     $(749.76)    $(3,197.76) 4    $1,415.00     $212.24     $19,526.90     $19,101.74     $(425.16)    $(3,622.92) 5    $1,415.00     $216.49     $19,577.84     $19,483.78     $(94.06)    $(3,716.97) 6    $1,415.00     $220.82     $19,629.79     $19,873.45     $243.66     $(3,473.31) 7    $1,415.00     $225.23     $19,682.79     $20,270.92     $588.13     $(2,885.18) 8    $1,415.00     $229.74     $19,736.85     $20,676.34     $939.50     $(1,945.68) 9    $1,415.00     $234.33     $19,791.98     $21,089.87     $1,297.89     $(647.80) 10    $1,415.00     $239.02     $19,848.22     $21,511.67     $1,663.44     $1,015.65 11    $1,415.00     $243.80     $19,905.59     $21,941.90     $2,036.31     $3,051.96 12    $1,415.00     $248.67     $19,964.10     $22,380.74     $2,416.64     $5,468.60 13    $1,415.00     $253.65     $20,023.78     $22,828.35     $2,804.57     $8,273.17 14    $1,415.00     $258.72     $20,084.66     $23,284.92     $3,200.26     $11,473.44 15    $1,415.00     $263.90     $20,146.75     $23,750.62     $3,603.87     $15,077.30 16    $1,415.00     $269.17     $20,210.08     $24,225.63     $4,015.55     $19,092.85 17    $1,415.00     $274.56     $20,274.69     $24,710.14     $4,435.46     $23,528.31 18    $1,415.00     $280.05     $20,340.58     $25,204.35     $4,863.77     $28,392.07 19    $1,415.00     $285.65     $20,407.79     $25,708.43     $5,300.64     $33,692.71 20    $1,415.00     $291.36     $20,476.35     $26,222.60     $5,746.25     $39,438.97 21    $1,415.00     $297.19     $20,546.27     $26,747.05     $6,200.78     $45,639.75 22    $1,415.00     $303.13     $20,617.60     $27,281.99     $6,664.39     $52,304.14 23    $1,415.00     $309.20     $20,690.35     $27,827.63     $7,137.28     $59,441.43 24    $1,415.00     $315.38     $20,764.56     $28,384.19     $7,619.63     $67,061.05 25    $1,415.00     $321.69     $20,840.25     $28,951.87     $8,111.62     $75,172.68 26    $1,415.00     $328.12     $20,917.45     $29,530.91     $8,613.45     $83,786.13 27    $1,415.00     $334.68     $20,996.20     $30,121.53     $9,125.32     $92,911.45 28    $1,415.00     $341.38     $21,076.53     $30,723.96     $9,647.43     $102,558.88 29    $1,415.00     $348.20     $21,158.46     $31,338.44     $10,179.98     $112,738.86 30    $1,415.00     $355.17     $21,242.03     $31,965.20     $10,723.18     $123,462.04 31    $-       $362.27     $4,347.27     $32,604.51     $28,257.24     $151,719.28 32    $-       $369.52     $4,434.21     $33,256.60     $28,822.39     $180,541.66 33    $-       $376.91     $4,522.90     $33,921.73     $29,398.83     $209,940.50 34    $-       $384.45     $4,613.36     $34,600.17     $29,986.81     $239,927.30 35    $-       $392.14     $4,705.62     $35,292.17     $30,586.55     $270,513.85 36    $-       $399.98     $4,799.73     $35,998.01     $31,198.28     $301,712.13 37    $-       $407.98     $4,895.73     $36,717.97     $31,822.24     $333,534.37 38    $-       $416.14     $4,993.64     $37,452.33     $32,458.69     $365,993.06 39    $-       $424.46     $5,093.52     $38,201.38     $33,107.86     $399,100.92 40    $-       $432.95     $5,195.39     $38,965.41     $33,770.02     $432,870.94           Total Mortgage      Total Rent                  $654,364.76     $1,087,235.70

The higher inflation actually is, the faster buying saves you money. That's why I'm a firm believer that "how long you're going to be in the home" is the FIRST question you need to ask when debating buying vs. renting.  Even on the odd chance you invested the difference, the basic math that inflation makes rent more expensive in the long run still plays out (especially if you invest the difference in both directions).

[RWD]

You can't compare rent to mortgage payment directly. There are a lot of factors that affect the long term financial picture. Have you tried using the NY Times rent vs buy calculator?
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

With the default settings it's saying that buying a $300k house is roughly the same cost as renting for $1,040/month.

[Millennialworkerbee]

Just chiming in about the needing more square footage for a baby thing.. you don’t mention how your 900 sq ft is broken up as far as # of rooms. But we are living in a 1150 sq ft house and about to have our second child. And we plan to stay for the foreseeable future. We thought for sure that this house would be WAY too small once we were a family of 3.. it turns out we absolutely love living “small”. We’ve got 2 bedrooms and a closed in sunroom that we use as a playroom/office/guest room.

Like you we’ve got a below market rent situation going on, so it makes financial sense for us to take advantage of it for as long as possible.

I know we’ve got 25% more space than you do, but I’d encourage you to stay in your current space until the LO gets here, and then some. Little kids want to be in the same room as you anyway and a small house forces you to own less stuff. If you have a 2nd bedroom or anything close to it that can house a crib, it’s totally doable.

[MountainTown]

Thanks everyone for the replies...well it sounds like a resounding NO.

I'm going to try to answer the questions....yes it's about 900 square feet but it is very old so as you can imagine the space is awkward, not efficient, and built in's are clumsy and annoying.

 I can admit we have been meaning to de clutter but just never seem to find the time with our work schedules. Anyone have any good resources/ideas?

The other issue is I work from home most of the time and that really helps my chronic pain issues. I do have access to an office as well at work....so anyways that takes up most of one room.

I will try to respond to the other comments later.

[joonifloofeefloo]

I can admit we have been meaning to de clutter but just never seem to find the time with our work schedules. Anyone have any good resources/ideas?

This happy Gauntlet :)   https://forum.mrmoneymustache.com/throw-down-the-gauntlet/continued-getting-rid-of-stuff-clearing-out-clutter!-part-2/

A lot of us there love KonMarie's book/steps. Some prefer those of other minimalist blogs/sites/etc. Otherwise, just sharing our little wins and steps is motivating.

I did WFH with a roommate and my baby in under 900 sq ft 1940s suite. It can be done (easily and comfortably). Come join us in ditching excess and in six months you'll be in a much better position to evaluate needs, etc. That will help keep your costs low for the rest of your life.

[jlcnuke]

You can't compare rent to mortgage payment directly. There are a lot of factors that affect the long term financial picture. Have you tried using the NY Times rent vs buy calculator?
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

With the default settings it's saying that buying a $300k house is roughly the same cost as renting for $1,040/month.

For 9 years. If you move it to 30 years it drops to $884/month. What it's showing you is equivalent spending costs with that (i.e. how much you can spend - which may or may not get you a similar residence). What I was showing was equivalent living (i.e. difference in spending when buying vs. renting the SAME place) costs using the prices vs rents for the OP's area.

The key on their page is to put in all the inputs as accurately as you can. As a general rule, very, very, very few areas have ever been better to rent vs. buy for people who plan on being there for long periods of time (and probably none for 30+ year time periods).

[RWD]

You can't compare rent to mortgage payment directly. There are a lot of factors that affect the long term financial picture. Have you tried using the NY Times rent vs buy calculator?
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

With the default settings it's saying that buying a $300k house is roughly the same cost as renting for $1,040/month.

For 9 years. If you move it to 30 years it drops to $884/month. What it's showing you is equivalent spending costs with that (i.e. how much you can spend - which may or may not get you a similar residence). What I was showing was equivalent living (i.e. difference in spending when buying vs. renting the SAME place) costs using the prices vs rents for the OP's area.

The key on their page is to put in all the inputs as accurately as you can. As a general rule, very, very, very few areas have ever been better to rent vs. buy for people who plan on being there for long periods of time (and probably none for 30+ year time periods).

Sorry, I wasn't meaning for that to be a direct response to your calculations but rather to the original post. The original post was stating that houses valued $240k-$300k were renting for $1200-$1500 and implying that this was better than a mortgage for the same places. I think we both agree that buying will typically be cheaper in these cases.

Yes, that calculator works best the more accurately you can set the inputs. There are some difficult assumptions to make (i.e. rent inflation, investment returns, etc.), but it should be a much better analysis than just assuming something like "Rent $1500, Mortgage $1600" means renting is cheaper.

[BAM]

900 sq ft is large for 2 people, even adding a baby or two kids would work. We are a family of 11 living in 1966 sq ft and it feels big to us. We are minimalist except for books and kids though : ).

Some resources:
Blogs:
http://www.600sqft.com/ - family with 2 young kids living in 600 sq ft. She does buy expensive stuff but also has some really creative ideas for how to make the space work for them.
https://www.readingmytealeaves.com/ - another family with 2 kids. Lives in a one bedroom.
https://www.becomingminimalist.com/ - he has a list on his blog mentioning other minimalism blogs also.
https://www.theminimalistmom.com/

Books:
KonMari
Minimalism by Millburn - they have a documentary also (I think it's on Netflix)
Joy of Less - by Francine Jay

[FrugalFisherman10]

If you move, will you buy your forever home or just a temporary one?

A $300k mortgage will run you ~$1,615/month ($1,415 PI plus around $200/month for taxes and insurance I'm estimating). So you'd start out about $100/month more expensive than renting. If you're sticking around, however, and assuming 2% inflation (affecting rent 100%, but only the taxes and insurance on the mortgage), 40 years later buying would have cost you $654,365 while renting would have cost you $1,087,235, a difference of $432,870. Additionally, at 2% inflation, rent becomes more expensive than that "more expensive" mortgage only 6 years later and by year 10 you've saved money overall by renting.

Per your chart, shouldn't that say "You've saved money overall by buying"?

[jlcnuke]

If you move, will you buy your forever home or just a temporary one?

A $300k mortgage will run you ~$1,615/month ($1,415 PI plus around $200/month for taxes and insurance I'm estimating). So you'd start out about $100/month more expensive than renting. If you're sticking around, however, and assuming 2% inflation (affecting rent 100%, but only the taxes and insurance on the mortgage), 40 years later buying would have cost you $654,365 while renting would have cost you $1,087,235, a difference of $432,870. Additionally, at 2% inflation, rent becomes more expensive than that "more expensive" mortgage only 6 years later and by year 10 you've saved money overall by renting.

Per your chart, shouldn't that say "You've saved money overall by buying"?

Yep, I wrote that wrong. Good catch. I'll update the post.

[FrugalFisherman10]

If you move, will you buy your forever home or just a temporary one?

A $300k mortgage will run you ~$1,615/month ($1,415 PI plus around $200/month for taxes and insurance I'm estimating). So you'd start out about $100/month more expensive than renting. If you're sticking around, however, and assuming 2% inflation (affecting rent 100%, but only the taxes and insurance on the mortgage), 40 years later buying would have cost you $654,365 while renting would have cost you $1,087,235, a difference of $432,870. Additionally, at 2% inflation, rent becomes more expensive than that "more expensive" mortgage only 6 years later and by year 10 you've saved money overall by renting.

Per your chart, shouldn't that say "You've saved money overall by buying"?

Yep, I wrote that wrong. Good catch. I'll update the post.

Great, thanks! Glad I wasn't going crazy

[Mikila]

Rent.  A comparison of payment vs mortgage ignores hefty expenses that come with buying.  These drive the price of owning up by some amount, usually significantly in my experience.
Also there are opportunity costs associated with buying.
For example, what could that $50K earn if invested over the lifetime of ownership?  Add that in, and what higher paying jobs might you turn down because you are tied to your location- big transaction costs for selling.
If you stay long term, plan on, at the very least, replacing the roof  & hot water heater, furnace, etc, painting the place, fixing the fence, and so on.  These add up fast.  Also, when people own they tend to "make it their own" which costs $. 

[RWD]

Rent.  A comparison of payment vs mortgage ignores hefty expenses that come with buying.  These drive the price of owning up by some amount, usually significantly in my experience.
Also there are opportunity costs associated with buying.
For example, what could that $50K earn if invested over the lifetime of ownership?  Add that in, and what higher paying jobs might you turn down because you are tied to your location- big transaction costs for selling.
If you stay long term, plan on, at the very least, replacing the roof  & hot water heater, furnace, etc, painting the place, fixing the fence, and so on.  These add up fast.  Also, when people own they tend to "make it their own" which costs $.

The calculator I linked above factors all these things in. You just need to input your assumptions such as maintenance costs and investment returns.

[joonifloofeefloo]

Yep, the NYT buy or rent calc is awesome. People often compare mortgage and rent, and realtors often use this as a pitch in their ads, but owning comes with a LOT more costs than just the mortgage. When I owned, I was surprised at the additional costs -and also how they could jump arbitrarily and without notice. I was very uncomfortable with that; some of those jumps made owning unsustainable for me. I’ve used the NYT calc for every round of consideration since I found it.