Author Topic: Analyzing the math behind the rent/buy  (Read 2824 times)

MountainTown

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Analyzing the math behind the rent/buy
« on: May 12, 2016, 08:54:46 PM »
Man we have really been struggling with this decision lately. We live in a small University town where real estate is booming. We love it here and don’t plan to move. Currently we are pretty happy with our house. We live right below the mountain–wife walks to work. We bike to downtown for drinks and even I’m only a 20 min bike ride from my work.

After getting married I admit there is a pressure to buy. I have researched and researched this and I have started to see the math in the J Collins approach to seeing buying a house as a terrible investment. I guess i just can’t get over the feeling that it would be so simple and easy to stabilize your living expenses by paying off a mortgage.

That being said, we rent way below market. Our landlord doesn’t believe in raising rent. The neighborhood we live in, for this square footage, a houses can sell for $260k while we pay 825 a month.

And yet we are looking to move into a “better” house. Ours is old and clunky in some ways–just not efficient in design. The wife is on board to just rent a nicer place…I am just stuck on the decision of whether to rent or buy. Does anyone have thoughts on our situation?

I posted before and one of the comments was to run the numbers. I have had a hard time doing this with ours. I think we have always come out in the middle. Like I said we rent for 825 a month. The particular neighborhood we live in ...the smallest house in the hood(965 sq feet) is listed at 260k. That's about the cost of our current rent. Frankly we would like something a touch bigger, perhaps 3 bed, 2 bath.  I would guess this would be in 275k range here but we could find something in the 250k range in a different neighborhood, maybe as low as 235k.

I have $65,000 saved up in a liquid savings account. I have another $65 in our retirement accounts, mostly traditional funds. Planning to do the Roth conversion ladder whenever we hit FI.

Part of my struggle now is just not knowing what to do with the money. Frankly it's eating me up watching it earn 1% interest. I would love to max out the retirement accounts, and invest the rest, maybe take a fun trip. But we plan to do a 15 year mortgage and we really need every penny of that if we do buy a house to make the payment affordable.

This would be our first home so I think we are both just struggling to see if we would like the lifestyle of owning or not. We definitely think wisftully about it but I also realize it could be a lot of headaches. Especially in this area...the houses people end up buying need a lot of work typically(or you really pay a premium).

Any math help really appreciated...any wisdom appreciated!!

JLee

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Re: Analyzing the math behind the rent/buy
« Reply #1 on: May 12, 2016, 09:12:50 PM »
$825/mo is far less than the cost of a $260k house.  How are you working the math to make that about the cost of your current rent?

MountainTown

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Re: Analyzing the math behind the rent/buy
« Reply #2 on: May 12, 2016, 09:15:02 PM »
Well I should have elaborated. 260k is to buy in this neighborhood which is the most expensive neighborhood in the city. We just got really lucky with cheap rent. Most likely we will have to buy in a cheaper neighborhood where I do think we have seen houses for 220k to 240k that would be adequate

backyardfeast

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Re: Analyzing the math behind the rent/buy
« Reply #3 on: May 12, 2016, 09:20:16 PM »
Remember that part of the math is that home ownership isn't just about the mortgage.  You become the ones responsible for maintenance and repairs, as well as taxes and utilities.  This can be a good thing, but it can also be expensive.  But it sounds like you're in a LCOL area if you can buy a house for those prices, so you may have lots of room in your budget to cover the additional expense.

In the end, if you're in a town you know you'll be staying a long time (more than 5 years), you enjoy doing house-work (repairs, landscaping, etc), carrying the mortgage and associated costs works both with your monthly budget and with your savings/FI goals, then go for it. 

We're paying more to own than it would cost to rent.  But being able to make a place our own, put in an extensive garden, put down roots, etc is very important to us, and it's worth working the extra years to pay for.  We know that travel and liquid assets isn't important to us at this stage of life.  But that's obviously not true for everyone.  It's a very personal decision, ultimately.

MountainTown

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Re: Analyzing the math behind the rent/buy
« Reply #4 on: May 12, 2016, 09:22:45 PM »
Yes I do think it would be a bit harder to pursue FI as I know I would want to payoff the mortgage asap. On the other hand, the mortgage would be paid off and in a lot of ways that makes FI way easier to grasp and predict. I know that's not how some view FI here but I like the stability.

JLee

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Re: Analyzing the math behind the rent/buy
« Reply #5 on: May 12, 2016, 09:26:57 PM »
Have you factored in your total monthly cost to buy, including homeowners' insurance and property taxes?  Also consider the opportunity cost of the down payment ($60k with the 4% rule is $200/mo).

I bought a house and I have no regrets ($140k house in a land of ~$1100 rent), but I do want to make sure you understand that it's going to cost a lot more than $825/mo.

MountainTown

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Re: Analyzing the math behind the rent/buy
« Reply #6 on: May 12, 2016, 09:29:02 PM »
Oh yea that's exactly my point. Right now we are committed to keeping it at 1/4 of our take-home pay with PITI(the DR way). And yea most of what we are looking at...it's really hard to keep it at that so we would be looking at 1500 to 1600 with all the expenses vs the measly 825 a month we pay now which is nice savings.

backyardfeast

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Re: Analyzing the math behind the rent/buy
« Reply #7 on: May 12, 2016, 10:12:18 PM »
1/4 of your take-home is a good formula.  Remember that a portion of that $1500 is the principal/equity you're building, though, so should be counted as savings rather than as part of the comparison with rent.  But that's a big difference: $825 vs $1500.  If you rented something more like what you wanted to buy, what would you pay?

It might be helpful to think through more of your FIRE plans, too. Is your goal to get to FI as soon as possible?  Once you're FI, what will you do (ie would you stay put or move somewhere else)? 

Let's say you're 10 yrs out from FIRE.  If you save the difference between renting and buying, earning 5% (or whatever number you're comfortable with) in the market, what do you come up with?  If you were to pay off the house in 10 yrs instead, what does your FI picture look like?  What's the appreciation like in your area, on average?  If you sold in 10 years, where would that put you?

All of this is very location dependent, obviously.  Someone in a hot market (San Franciso, or Vancouver) may well make more on their house than in the stock market, and then cash out to live in a lower COL area.  In a slower area, appreciation can be negligible, but if that's where you want to stay after you've retired, then it can still be the right decision.

JLee

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Re: Analyzing the math behind the rent/buy
« Reply #8 on: May 13, 2016, 02:18:37 PM »
1/4 of your take-home is a good formula.  Remember that a portion of that $1500 is the principal/equity you're building, though, so should be counted as savings rather than as part of the comparison with rent.  But that's a big difference: $825 vs $1500.  If you rented something more like what you wanted to buy, what would you pay?

It might be helpful to think through more of your FIRE plans, too. Is your goal to get to FI as soon as possible?  Once you're FI, what will you do (ie would you stay put or move somewhere else)? 

Let's say you're 10 yrs out from FIRE.  If you save the difference between renting and buying, earning 5% (or whatever number you're comfortable with) in the market, what do you come up with?  If you were to pay off the house in 10 yrs instead, what does your FI picture look like?  What's the appreciation like in your area, on average?  If you sold in 10 years, where would that put you?

All of this is very location dependent, obviously.  Someone in a hot market (San Franciso, or Vancouver) may well make more on their house than in the stock market, and then cash out to live in a lower COL area. In a slower area, appreciation can be negligible, but if that's where you want to stay after you've retired, then it can still be the right decision.

Alternatively, it may end up like Phoenix in '07 and crash. ;)

If I could rent for half the cost of buying, I would have a really hard time justifying buying a place.  Once you factor in maintenance/repair and the inevitable house projects (you mentioned buying one that needs some work), you can add even more to the disparity.

Blatant

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Re: Analyzing the math behind the rent/buy
« Reply #9 on: May 14, 2016, 06:42:54 AM »
^^ This. Coming from a life-long buyer, if I could rent for roughly half the price of buying and not have to worry about maintenance, I'd rent.

matchewed

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Re: Analyzing the math behind the rent/buy
« Reply #10 on: May 14, 2016, 07:33:00 AM »
Yeah JLee is right, what you're saying about the costs being equal isn't correct. Frankly just use the NYTimes calculator.

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

In your situation if you are just looking at numbers you should only be renting at this time given the information you've presented.

Retire-Canada

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Re: Analyzing the math behind the rent/buy
« Reply #11 on: May 14, 2016, 08:13:43 AM »
^^ This. Coming from a life-long buyer, if I could rent for roughly half the price of buying and not have to worry about maintenance, I'd rent.

Yes! Take the extra $800/month you don't spend on buying a house and invest it.

Starting with yout $65K plus your $800/month if you get 5% after inflation you'll end up with:

- 5 yrs = $138K
- 10 yrs = $232K
- 15 yrs = $352K


So you'll end up with the value of a house saved/invested in 10yrs while renting. You can use that money to FIRE and keep renting or to buy a house cash when the time is right. Even if you simply change your mind after 5yrs you have a healthy deposit ready.

The usual caveats apply with investing money after 5 yrs you might actually have $200K or only $80K.