Renting vs. Mortgage

[Bernard]

The renting vs. buying discussion isn't new, but I'd like to present our case to you for your feedback.

The wife and I live in a nice part of Southern California. We love it here, have family roots here, and I part-own a business that can't be "moved."
We started our path to FI very late in life and bring home on average $8,5 K per month combined after taxes. My FICO is now 841, my wife's 802. We have no debt.

We have been renters "forever," in large part because it's silly expensive here.
 
Lived in a small 2+2 midtown charmer at $1,500 per month, a home the landlords would NEVER want to sell, until they informed us after 13-1/2 years that they needed to sell the house. We got 60 days to move. Looked everywhere, got lucky slightly outside town and rented a 3+2 for $2,200 per month, another house the landlords NEVER wanted to sell. In both those cases applicants are standing in line to get lucky. At that point we didn't want to depend on luck anymore, so we made plans to buy a year or so later. Went to about 100 open houses and learned the market inside and out.

Crazy enough, about a year later, the landlords informed us that they wanted to sell the house. They were asking $595K, which we found about $100K to expensive. We then lightened the belt and shortly later bought a wonderful home in need of some work, but with great potential, for $555K.

Paid 10% down, our 30-year mortgage is $3,149.59 including PMI of $133.20.

If we were to rent this or a similar house, it would cost us about $2,500 to $2,900, so just a few hundred dollars less. Our mortgage is basically rent plus principal.

We are slowly improving the property, started out with all new wood floors ($10K), then did the siding ($15K), countertops, now doing landscaping. We plan on staying another 9 years, at which time the property should be worth about $690K. We will by then owe still $390K, so after selling fees we should be left with $250K, give or take. Our plan is to take that money and buy our final house outright. Most likely in or around Asheville, NC.

By then the sale of my business and my retirement investments should be sufficient to survive. Eventually, we will get about $2,500 in SS benefits per month, so we'll be fine.

Given the circumstances outlined, was buying a house a smart decision or crazy? Any advice for us or people who live in a market where rent and real estate are out of control?

Thanks!

[ysette9]

The NY Times Rent vs. buy calculator (google it since adding a link on my phone is cumbersome) is a great way to answer that question.

When we ran our numbers for the Bay Area the calculator told us that it makes sense to buy if we are planning on staying for 10+ years. So we did. I suspect your area is similar to ours so your result will likely be similar.

[reeshau]

Lived in a small 2+2 midtown charmer at $1,500 per month,

...got lucky slightly outside town and rented a 3+2 for $2,200 per month,

If we were to rent this or a similar house, it would cost us about $2,500 to $2,900,

One problem I see in your story is that you have allowed your housing expenses to creep up 75%, without a commensurate change in your lifestyle (i.e. kids, home office, etc.)  While this is caused in part by the fact that rents will rise as housing costs rise, (which is one big benefit of a mortgage--freeze your costs, outside of taxes) it has also, at least in part, been something you had control of.  Have you seen specific benefits for that difference?  (much less, the even higher mortgage you now have)  Or were you simply riding the hedonic treadmill?

@ysette9 's resource can give you detailed numbers, but you will not "make" money on the house selling at that price: you won't get out more than you put in.  Pitting that vs. renting + investing the difference might give you an answer, but I don't know what the point would really be--you are already committed to this path.  Reversing it now might be the worst decision of all.

[Bernard]

Let me clarify something: rents simply have gone up so much. The house I rented for $1,500 would have rented out for $1,900 had I vacated. The next step, $2,200, was out of town, and it was as cheaply as it gets. I watched rents going up, in large part because people who rented out single family homes decided to sell and there's not enough places to rent. One reason is that a $550K home brings only $2,500 in rent, so less than half what it should bring purely as an investment.

Renting a 1-bedroom apartment in the ghetto costs $1,800 now, a 2-bedroom $2,000, so $2,600 for a 3-bedroom house is a decent deal. For every such house for rent, there's a line of people wanting to take it.

So the issue here is does it make sense to pay $2,600 for rent, or $3,100 for a mortgage, which in part carries equity?

I should mention that we max out our IRAs (now $14,000 per year), plus we put $12,000 in my wife's 401K -- sadly NO employer match).

[reeshau]

Renting a 1-bedroom apartment in the ghetto costs $1,800 now, a 2-bedroom $2,000, so $2,600 for a 3-bedroom house is a decent deal. For every such house for rent, there's a line of people wanting to take it.

I acknowledged that rents went up, but you did explicitly go from a 2-bed to a 3-bed.  By your numbers, that's $600 / month.  If that's worth it to you in some way you haven't yet mentioned, so be it.  But that's your choice, not market inflation.

Again, this is all water under the bridge.  It seems like you are looking for affirmation, at the risk of buyer's remorse.  You're already committed to this direction, and undoing it would just double your transaction costs.  As long as these numbers aren't jeopardizing other priorities for you, (we have no idea of housing as % of your income) be at peace with the decision and move on.

[zolotiyeruki]

I disagree that your new mortgage is "rent + principal payments," because you've already paid an additional $25k+ for improvements, and you haven't included regular maintenance and repairs.

I wonder if your landlord(s) would have let you stay had you agreed to a rent increase.  You were paying well below market rate.  I don't know enough about your specific location, but I've heard that rent control (and other laws) in some areas of CA prevent landlords from increasing rent to market rate AND prevent (or complicate) terminating a lease (in order to charge a new tenant something more aligned with the market)...unless the landlord is selling.

Renting a 1-bedroom apartment in the ghetto costs $1,800 now, a 2-bedroom $2,000, so $2,600 for a 3-bedroom house is a decent deal. For every such house for rent, there's a line of people wanting to take it.

I acknowledged that rents went up, but you did explicitly go from a 2-bed to a 3-bed.  By your numbers, that's $600 / month.  If that's worth it to you in some way you haven't yet mentioned, so be it.  But that's your choice, not market inflation.

Again, this is all water under the bridge.  It seems like you are looking for affirmation, at the risk of buyer's remorse.  You're already committed to this direction, and undoing it would just double your transaction costs.  As long as these numbers aren't jeopardizing other priorities for you, (we have no idea of housing as % of your income) be at peace with the decision and move on.

This is a classic example of a mustachian facepunch.  Love it!

[Bernard]

2nd landlord decided to sell as well, as they bought another property up north to live there. People who have single family homes rented out here in masses decide to sell, as it makes financial sense. Rule of thumb is 1% of investment in property per month in rent. That would be $5,500 per month here for a 2 or 3 bedroom, and that's just not in the stars (thankfully).

I went from a 2 bedroom to a 3 bedroom because I had 60 days to find a new place to live and I would have taken anything from a 1-bedroom to a 5-bedroom, anywhere within commuting distance. Renters here are desperate, and the Thomas fire that has destroyed many homes has made finding a rental all the more difficult.

Regarding the improvements . . . I bought an outdated home for $555K, got $10K back at closing. Appraisal at the time of purchase by my lender was already $591K, and I have put in about $45K now, and my guess is that the property is already worth around $625K. In 8 years, when we want to sell, we think it's going to be easily worth $699K, and at that time we will still owe $385K mortgage. That leaves us with around $314K minus cost of sale. That's enough to buy our forever home in NC outright with cash.

[RWD]

The NY Times Rent vs. buy calculator (google it since adding a link on my phone is cumbersome) is a great way to answer that question.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

[ysette9]

The NY Times Rent vs. buy calculator (google it since adding a link on my phone is cumbersome) is a great way to answer that question.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Thank you

[reeshau]

I went from a 2 bedroom to a 3 bedroom because I had 60 days to find a new place to live and I would have taken anything from a 1-bedroom to a 5-bedroom, anywhere within commuting distance. Renters here are desperate, and the Thomas fire that has destroyed many homes has made finding a rental all the more difficult.

Not to rub your face in it, but that explains your 2nd move. (and you did specify you had limited time)  It does not explain your last move, where you stayed with 3 beds over 2.  A 3/2 is a "classic" choice for homebuyers, so it's a decision for saleability.  But is it too much home for you?  Are one of the bedrooms empty, or have you filled it with things you don't need, or don't often use?  Either way is a waste.

Regarding the improvements . . . I bought an outdated home for $555K, got $10K back at closing. Appraisal at the time of purchase by my lender was already $591K, and I have put in about $45K now, and my guess is that the property is already worth around $625K. In 8 years, when we want to sell, we think it's going to be easily worth $699K, and at that time we will still owe $385K mortgage. That leaves us with around $314K minus cost of sale. That's enough to buy our forever home in NC outright with cash.

This is why I ended my last comment with be at peace with your decision.  It gets you to where you want to go.  It might not be the most optimal route mathematically, and that's what strangers will focus on because that's all the context we have.  But if you are heading in the direction you are steering (heck, if you are steering at all) you are better off than most people.

My comment on not making money goes like this: $55k (10% down) + 120 months x $3149.59 + $45k reno = $378,050.80 spent to live.  *If* you get the selling price you think, then you have escaped HCOL with most of your money back.  It is just as feasible to say that if you had instead rented a 2 bed, saved the difference (including your upfront of $100k) and invested it over 10 years, you could reach a similar amount.  ($401k at 7% nominal annual return, )  Both stocks and coastal real estate are at high levels suggesting bubbles, so both paths have risk.  Whether one was better than another is an academic exercise, as I lay out above.

You have a solution that works.  That's what matters most.  It's OK to learn about alternatives, but comparing yourself to the maximum optimal solution all the time can also be maddening.

[Bernard]

You have a solution that works.  That's what matters most.  It's OK to learn about alternatives, but comparing yourself to the maximum optimal solution all the time can also be maddening.

I appreciate your input, and based on it I have crunched the numbers myself, assumed I had not spent the money on downpayment, closing cost, points, and renovation, and invested the balance between rent and own, and you are right. Under the best of circumstances, I am at about the same level after selling the house as I would be had I invested the money.

But can we really reduce everything to numbers? My wife buys organic foods for the "dirty dozen," and that stuff is much more expensive than regular fruits and vegetables. Wasted money?
We buy free range eggs purely because of the hens, not ourselves. Wasted money?
Why live in a small apartment when one can buy an old RV for a few thousand quid and then live pretty much rent free? Wasted money?
How about not going on vacations at all? That costs money that could be invested instead?
Children? A cat or dog (we have both)? Pure "luxuries" and a waste of money?

There is always a way to decrease spending. If so desired, one could live almost like a homeless, ride a $25 bicycle, get clothes from the curb, eat at the shelter, and save a ton of money on everything!

We don't do that though. The reason is that even people who value having money have other priorities on the side. They want to live in a nicer neighborhood. They want a child or two, a cat, a dog, or two. They want to take a vacation. They want to buy healthy food. And, finally, many of those like to be free from dirty carpets, ugly paint, noisy neighbors, and, most importantly, landlords who can send you on the road without a warning. Happened twice to me, and it's nerve-wrecking.