Author Topic: Reader Case Study - Renter to homebuyer- check my math  (Read 472 times)

cashstore2022

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Reader Case Study - Renter to homebuyer- check my math
« on: November 14, 2017, 06:35:22 AM »
Sold my home previously after 10 years; lost my ass.  Swore I'd never own again.  Moved to within 3 miles of my and my wifes work in a university town, got lucky on a cheap $1,200 apartment.  It's a little crappy, but they could easily charge me $1,500 for it. 

Eventually we are going to have a 3rd & 4th kid, so we'll need a 4 bedroom.  SInce I live in a university town, that's $1,800-$2k per month.  Obviously that's a no-go, but, and this is serious, I've looked for 18 months for better apartments within biking distance, and they don't exist at 4 bedroom for less than $1,800.

My wife and I have 7-8 years until we hit our $1M goal for FI.  It depends a great deal on what happens to health care and college for my daughter (4 years off), which is why we are erring on the side of 'at least' $1M.

What surprised me is that once I crunched the numbers, I calculate myself coming out ahead by about $1k over 7 years by buying a $204k home (putting $3k in upgrades for $207k total) versus renting at $1,200... and again, I'm probably looking at $1,800+ in a few years.  And FWIW, at $207k I can get a nice house next to my daughter's elementary school, new furnace, new kitchen, the works.  It makes the apartment I'm living in seem like a Calcutta slum.  Plus I can hold my daughter's hand while I walk her to her 1st day of school since it's across the street.  And I can walk to work.

So my numbers and assumptions:
5.65% - expected after tax investment return (or opportunity cost of my downpayment)
2% housing price appreciation
Ownership length - 7 years
6% realtor commission on sale at $207k*(1.02^7)
$455/m in T&I; this is an estimated average of the 7 years
15 year mortgage at 3.375%; adding back principal paid over 7 yrs but not investing it
$63k down payment, roughly $140k mortgage
$65 increase in monthly utilities over my small apartment (probably high)
$57.60 in monthly increase in maintenance on house, expenses, lawnmowing, etc.  This includes the purchase of a $300 pushmower. 
I come out about $16k better off over 7 years, or over $2k per year better off, versus the $1,200 per month rent.

Please look over my assumptions and math.  Be as critical as you want to be; prizes for the most flippant response if you want to play that game (it won't hurt my feeling) on my stupid assumptions or math errors.

Thanks in advance!

Edit: Included my excel in attachments.  Also:
We generally put $60k into 401k/403b.  Total income of $125k including bonuses.  Effective federal tax rate of 1.2%. 
« Last Edit: November 14, 2017, 07:25:40 AM by cashstore2022 »

nereo

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #1 on: November 14, 2017, 07:38:27 AM »
yeah, i agree with both your numbers and your conclusion.  The inputs seem reasonable (a nice change from the overly optimistic numbers some people use) and IF you could continue to rent at $1200/mo you will come out SLIGHTLY ahead.  If $1800/mo is what you'd spend for an equivalent property then buying puts you way ahead over 7 years.  The only thing I was blindly guessing on is the cost of insuring and any potential HOA fees (know those ahead of time)

Final thoughts - are you prepared for home ownership (again)?  That means the time lost fixing and maintaining your property, etc.  Some like it, some hate it.  If you hate it, is saving ~2.5k/year worth the lost time and added stress/frustration?

FWIW I find this rent vs. buy calculator to be excellent, with good presets and the ability to tweak just about any of the costs.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
"Do not confuse complexity with superiority"

cashstore2022

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #2 on: November 14, 2017, 08:46:16 AM »
Thanks for the look over.  And no, I hate the idea of doing repairs around the house.  I actually enjoy landscaping, though I don't like paying for rosebushes and dwarf Japanese maples.  My cheap way around that is to do an indoor hydroponic clone of existing plants; in 2 years you can have beautiful rose bushes and jap maple saplings for the cost of a few CFL lightbulbs.  But I digress.

What I hate the most is that my ultimate goal is to retire and be an airbnb and housesitting retiree; I also have global arbitrage dreams of spending 5 months in places like Thailand and Cambodia.  Buying a home is pretty much the opposite of that; plus our city is a Nazi about renting your home out AirBnb, so I'd have to sell. 

Also no HOA fees.

Thanks again,

Lumberjack

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #3 on: November 14, 2017, 10:42:29 AM »
I didn't see, and very well may have missed, the $3k in reno costs factored into the lost investment opportunity. That may well be negligible, but it is almost 5% of your down payment.

In my experience moving from renting to owning, monthly utility costs went up a fair bit more than $65. YMMV and you're in a better position to assess your current included utilities, but my water and sewer bill (which I didn't pay when renting) is more than that.

The only other thing that I can think of that may be relevant is additional closing costs.  My county has a 2% land transfer tax, with the buyer and seller usually splitting on each transaction. All of that said, you're probably still going to come out on top if the rest of your assumptions play out.

Canadian Ben

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #4 on: November 14, 2017, 10:50:11 AM »
Why is the downpayment 63k?

You say your investment aim is 5.3% and mortgage 3.3%, so why not put down the minimum to have no penalities?

And you can find a pushmower in a 2nd hand store. There is no reason to pay 300$ for it, they are good for decades.

200k houses are much better in price than renting for more than 1500. Your math is good as long as you can take care of small issues (DIY)


cashstore2022

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #5 on: November 15, 2017, 12:27:21 PM »
I didn't see, and very well may have missed, the $3k in reno costs factored into the lost investment opportunity. That may well be negligible, but it is almost 5% of your down payment.

...........

The only other thing that I can think of that may be relevant is additional closing costs.  My county has a 2% land transfer tax, with the buyer and seller usually splitting on each transaction. All of that said, you're probably still going to come out on top if the rest of your assumptions play out.

I think you got both exactly right.  I was typing quickly, and I thought I put the $3k in, but at best it's confusing.  As I see it - and it's debatable - the renovations going into additional marble countertops, a sump pump for the basement, insulation for the attic, and drainage tile for the downspouts 'ought to' increase the value of the property by around $3k, since I'm putting in a 'yuge' amount of labor into it. 

And yes, I omitted additional closing costs.  Things like front loading the escrow are essentially money I get back after selling, so not lost - let me know if I'm thinking about it wrong.  But yeah, at least $2,500 of BS things like title searches, underwriting fees, and the rest are going to get frittered away.

cashstore2022

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #6 on: November 15, 2017, 12:31:36 PM »
Why is the downpayment 63k?

You say your investment aim is 5.3% and mortgage 3.3%, so why not put down the minimum to have no penalities?

And you can find a pushmower in a 2nd hand store. There is no reason to pay 300$ for it, they are good for decades.

200k houses are much better in price than renting for more than 1500. Your math is good as long as you can take care of small issues (DIY)

I've actually started drawing up door hangers to start a lawncare business in the neighborhood.  VistaPrint is awesome.  So I'll push mow until I get more than 5 accounts, then get a nice 48" walk behind.  I'll pay for quality because I'm not mechanically inclined.

As to the downpayment... I wonder about that as well.  I can see that the maximum +EV play is to do the minimum 20% down and keep playing the market.  But I'm already very aggressively invested (100% equities, roughly 20% in specific companies like Apple, Amazon, Google, and a tech ETF).  I'm thinking of the extra down payment as a hedge play; diversifying my portfolio into a guaranteed, risk free 15 year bond at 3.375%.

If you disagree with that thinking I'm all ears.  My plan going forward is to max out the 401ks and 403bs ($55,500) and put the rest on the mortgage each year.

Canadian Ben

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Re: Reader Case Study - Renter to homebuyer- check my math
« Reply #7 on: November 15, 2017, 12:40:48 PM »

As to the downpayment... I wonder about that as well.  I can see that the maximum +EV play is to do the minimum 20% down and keep playing the market.  But I'm already very aggressively invested (100% equities, roughly 20% in specific companies like Apple, Amazon, Google, and a tech ETF).  I'm thinking of the extra down payment as a hedge play; diversifying my portfolio into a guaranteed, risk free 15 year bond at 3.375%.

If you disagree with that thinking I'm all ears.  My plan going forward is to max out the 401ks and 403bs ($55,500) and put the rest on the mortgage each year.

Pushmowers are incredibly simple machines, you are paying for durability, but most that aren't crazy cheap materials are just as nice as the 300+ ones. Since they last forever, and have about 4 moving pieces, even older ones can be still in perfect shape.

For your house, it's a less optimized strategy, especially since your bond is stuck in your house forever, unlike an actual bond that you could sell to use it to pay for things. (Once it's in the house principal, it's there forever!). Though as long as you are aware of the exchange you are making for an emotional choice (lowering debt) then it still makes sense.

I'd personally pick something other than house principal, since that money is no longer liquid, but I have no issues with risk.