Author Topic: Buy vs Rent? (Again, this time with a calculator)  (Read 8785 times)

Mr. Tiny Stache

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Buy vs Rent? (Again, this time with a calculator)
« on: October 18, 2012, 11:46:33 AM »
Hello Mustachians!

The wife and I are struggling with the common rent vs. buy calculation. We live in Seattle. She works at the UW and I work around town but mostly downtown. We have been doing really well at growing the stache and have a good for new mustachians savings rate. Trouble is houses without commutes here are expensive. Perhaps the trouble is that we are looking at houses with 3 bedrooms. We are doing this so there is room for us + kids + visiting parents. In our current neighborhood (which is super short commute friendly + has amazing walkscore) we are looking at $400,000+. Probably more on the + side. Most affordability calculators out there do not have mustachians in mind. I run the numbers and they tell me that "conservatively" I can afford a $800,000 house. I'm not buying it. Literally.

So, time for the question. Have any of you looked at the NY Times "Is It Better to Buy or Rent?" calculator? It is available at http://www.nytimes.com/interactive/business/buy-rent-calculator.html. When I run the numbers on a $450,000 house with a 20% down payment (and other reasonable values) it seems to think I start coming out ahead in 8 years.

So what are other mustachians in expensive real estate markets like Seattle, San Francisco and the like doing?

bo_knows

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #1 on: October 18, 2012, 12:17:12 PM »
FWIW, We live in the suburbs of Washington DC (pretty expensive housing market).  We ended up getting a townhouse instead of a Single-Family-Home, because we wanted to minimize our spending in this expensive market.  That being said, our 3bdrm 40yr old townhouse was $384k in 2008 (while a lot of our friends we borrowing up to their gills for a $500k+ SFH). We put 20% down, and are about to refi at the monumentally low rate of 3.25%.  This makes our mortgage + property tax less than the rent we were paying on a 2 bedroom apartment closer in to the city.

I don't think there is anything inherently wrong with purchasing a home that is over $400k.  You just have to realize that more of your income is going to go toward the "investment" of real estate, than if you were living in a lower COL area.  Personally, we plan to move to a cheaper place whenever we hit FI.

TLV

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #2 on: October 18, 2012, 12:26:23 PM »
Make sure you check out the "advanced" settings in that calculator - they can drastically change the results. In particular, the default rate of return on investments is only 4% nominal.

For us, a big factor is the different required size of the living space for buying vs. renting. If we were to buy, we'd want a 3 bedroom house because we'd definitely need to live there for years to make it worth it, and we intend to have more kids in that time frame that would make fewer rooms impractical. The lower-end 3-bedroom houses at $300k come out ahead of renting a similar-sized house for $2k almost immediately, a similar-sized apartment for $1500 after about 9 years, but NEVER compared to a 2-bedroom apartment at $1200 - and we're currently still in a 1-bedroom we found for $875, and can easily stay in until kid #2 comes along. By the time we need a large enough space that buying would be a long-run win, we'll be close enough to FI that it will be better to wait and buy in a lower-cost area (since we're only tied here by my job).

arebelspy

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #3 on: October 18, 2012, 05:13:26 PM »
So what are other mustachians in expensive real estate markets like Seattle, San Francisco and the like doing?

Renting.

If you want to invest in real estate and your local market sucks, go elsewhere. (Either literally - move - or rent and invest out of state.)  Why buy into a sucky investment as if it is your only choice?
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gdborton

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #4 on: October 18, 2012, 05:58:55 PM »
Quote
invest out of state.

I've seen you suggest this a few times.  Is this something that you've done?  How do you manage such a thing, I imagine that you'd inspected the prop personally before purchasing and then use a property management company to basically play landlord.  Is that about right?

arebelspy

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #5 on: October 19, 2012, 08:21:04 AM »
Quote
invest out of state.

I've seen you suggest this a few times.  Is this something that you've done?  How do you manage such a thing, I imagine that you'd inspected the prop personally before purchasing and then use a property management company to basically play landlord.  Is that about right?

Yeah, I don't mean to mention it too much, but I generally bring it up in threads where people aren't sure about investing in their local area because it's not a good investment.  Often people don't see investing outside their area as an option, so I'm just trying to point out that it is.

I do some investing out of state, but not long distance landlording.  That is one option, if you want to go that way.  My preferred method is being a private money lender with the loan secured by real estate.  I have a note on a property in MS, for example.

No need to deal with tenants out of state, just deal with other real estate investors, can loan them money, invest in their local area, and make a good return.  Either via partnership or private/hard money lending.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Self-employed-swami

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #6 on: October 19, 2012, 10:00:10 AM »
Arebelspy, have you ever had any legal issues with your private mortgage lending?

It's an interesting proposition to me, but I'm not sure I'm comfortable with the downsides ($$$ and frustration) that might come with a whole lotta legal nonsense to go through foreclosure. Or, are you in a some sort of lending pool?

Self-employed-swami

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #7 on: October 19, 2012, 10:21:49 AM »
To address the OP in their question, I'll provide our numbers:

We are in a higher COL area as well (but not as high as some, like what Houston was like before the housing tanked).

We were paying $900/month for our one bedroom apartment, where I was 3 blocks from work, and we had 1 car.  Our rental insurance was something like $22/month, and all of our utilities were included.

A 2 bedroom condo was in the $320,000+ price range, if we wanted to stay central to the city (I was indifferent, but the Mr was opposed, he wanted a yard of our own, and a garage).  Houses in the central area, without a garage, and a lot with no real lawn started at around $500,000 for a complete rehab house, 1000 sq ft.

We looked at the transit routes, and bought a place with direct bus service to downtown ($85/month for a bus pass) in an older neighbourhood, on the 'wrong side of the tracks'. The reputation was completely unfounded though.  The community is very similar to the town I grew up in, with most everything we need, within walking distance (less than 1km. Costco and the other big box stores are just a 3 minute drive (across a highway though, so walking isn't the best idea).  We've had a few car break-ins, but that's been kids most-likely, and the police told me it happens everywhere (we got some alarms and stopped leaving anything valuable in the cars).

We are a 30 minute drive from my Dad's house, down the highway, which is much nicer than the 1 hour+ from downtown to get out to his house.

We bought near the bottom of the drop for us (about 20% decrease in some really over-inflated areas) and paid $373,000 for our house 3 years ago.  We were in the position to put 64% down on the mortgage, and got an interest rate of 3.09% on an $89,000 mortgage, and 4% on a HELOC for the balance.  Our monthy mortgage housing costs are as follows now (we've paid off the HELOC and borrowed it again for an investment, so we pay only the interest every month):

Mortgage minimum payment is something like $87/week, however I've been making double payments the whole time
Insurance is $88/month
Property Tax is $192
All of our utilities combined (gas, water, electric, sewer, garbage, recycling) comes out to an average of $180/month over the year (more in the winter, less in the summer).
Interest on the HELOC ~$285/month, depending on what exactly our investments are doing.
I also put away $100/week for house improvements and emergencies.

So, our overall minimum housing costs increased to about $1122, and our transportation costs increased while I was still working downtown, but the awesomeness factor of our quality of life also tripled.  We have a 1700 sq ft four level split with 3 bedrooms, and 2.5 baths.  We have a partially finished basement with an office in it, and a decent enough yard for our needs.  We have parking for 2 very tiny cars in the garage (well, parking for none really, since it's usually full of my husband's furniture refinishing projects) and parking for 2 on our driveway, which makes it much easier to have people over.  When we lived downtown, our parents hated visiting us, because parking was such a nightmare!  Now we see my Dad a few times a month, and my mother in law at least a few times a week. 

We've got more than enough house to have some kiddos in, and we won't need to move ever.  And there were some neat bonuses to our house, like a pre-existing sprinkler system (saves water on keeping the lawn green, as it only needs 5 minutes 3 days a week).  We were also able to buy all the outside furniture, and lawn maintenance equipment from the people selling the house, for a tiny fraction of what it would have cost us otherwise, since it was so convenient for them to just leave everything behind.

Since our investment in our house is holding value, and we won't be selling it anytime soon, it seems like a safe enough place to park the majority of my $$$ thus far.  I also have RRSPs and other investments totalling more than enough to pay of the LOC if we needed/wanted (and a good additional chunk of the mortgage as well).
« Last Edit: October 19, 2012, 10:26:54 AM by Self-employed-swami »

arebelspy

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #8 on: October 19, 2012, 10:54:14 AM »
Arebelspy, have you ever had any legal issues with your private mortgage lending?

It's an interesting proposition to me, but I'm not sure I'm comfortable with the downsides ($$$ and frustration) that might come with a whole lotta legal nonsense to go through foreclosure. Or, are you in a some sort of lending pool?

Me specifically, no issues yet.

IMO, one ought to build in buffers into their returns to account for potential problems like that.  For example, I build in paying other people lots of monies to do repairs into my buy and holds, then if I can do it myself it's extra money saved. 

I have legal costs built into my numbers, then if/when everything goes smoothly (which, if you've done your homework, it should) those costs are easily covered.

The way private lending works anyways is that you make MORE money when they default (even counting legal costs), as you get the property, which (if you've done it right) is worth much more than you loaned.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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RadicalPersonalFinance

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #9 on: October 19, 2012, 11:24:53 AM »
Perhaps the trouble is that we are looking at houses with 3 bedrooms. We are doing this so there is room for us + kids + visiting parents.

What is the price difference between a 3-bedroom house and a 2-bedroom house?  How much time do visiting parents actually spend with your family/in your home?  How many nights?

You might consider if the utility of the third bedroom is worth the premium price.  For my family, we have a standing offer to the parents: they are welcome to come visit at any time. If the couch-bed in the living room is not up to their standards, they are welcome to stay at a nearby hotel and we will help subsidize their stay.

We actually have set up lots of other options for visitors in the past: borrowed RVs in the driveway, everyone goes away to a resort (in many cases, the savings from not having a 3rd bedroom could finance a beautiful vacation in an exotic place), rent an apartment nearby for a month, etc.  There's always an option.

I've never understood the logic of paying a significant premium in home price plus plus the cost of property tax/heating/cooling/furnishing/etc. so that guests can have their own room.  Blow up mattresses in the living room seem perfectly sufficient to me.

Or, chipping in $50 a night for their hotel stay is financially superior as well.


arebelspy

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #10 on: October 19, 2012, 11:37:08 AM »
I've never understood the logic of paying a significant premium in home price plus plus the cost of property tax/heating/cooling/furnishing/etc. so that guests can have their own room.  Blow up mattresses in the living room seem perfectly sufficient to me.

Or, chipping in $50 a night for their hotel stay is financially superior as well.

That'll really all depend on the people involved.  If relatives were less likely to come because they'd have to have a blow up mattress (or force the host to), or going to spend less time visiting because of hotel costs (even subsidized), it may be worth the premium.

You're right though that one ought to look at those numbers and do a hard comparison along with looking at the people involved and what they're willing to put up with, rather than just presuming a guest room is the only way to go.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

desrever

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #11 on: October 19, 2012, 11:47:50 AM »
Something to consider: http://www.seattle.gov/dpd/Codes/BackyardCottages/Overview/ . Buy a smaller house and build a backyard cottage. If you're in a desirable neighborhood (Wallingford, Fremont, Queen Anne), you can AirBnB your little house and have it generate income when your family isn't in town.

Consider the north slope of Queen Anne, near the bottom (like off of Florentia). Bikable both to the UW (via BGT) and downtown (via Dexter/westlake); walkable to Fremont, nice elementary school. A fair amount of single family detached stock there; those get scarcer when you get closer to downtown. What you don't get is southern exposures, so less sunlight.

TLV

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #12 on: October 19, 2012, 11:48:33 AM »
What is the price difference between a 3-bedroom house and a 2-bedroom house? 

In the areas we've considered, there are no 2-bedroom SFHs. If you want less than 3 bedrooms, condos and townhouses are the only options. As such they're considerably cheaper (~$150-180k seems typical, compared to $300-$450k for a 3 bedroom SFH), but we aren't willing to buy anything with shared walls.

(Also, it amazes me how many people [on Zillow in particular] don't realize that the condo or townhouse they are selling is NOT a SFH.)

Self-employed-swami

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Re: Buy vs Rent? (Again, this time with a calculator)
« Reply #13 on: October 19, 2012, 12:52:03 PM »
Arebelspy, have you ever had any legal issues with your private mortgage lending?

It's an interesting proposition to me, but I'm not sure I'm comfortable with the downsides ($$$ and frustration) that might come with a whole lotta legal nonsense to go through foreclosure. Or, are you in a some sort of lending pool?

Me specifically, no issues yet.

IMO, one ought to build in buffers into their returns to account for potential problems like that.  For example, I build in paying other people lots of monies to do repairs into my buy and holds, then if I can do it myself it's extra money saved. 

I have legal costs built into my numbers, then if/when everything goes smoothly (which, if you've done your homework, it should) those costs are easily covered.

The way private lending works anyways is that you make MORE money when they default (even counting legal costs), as you get the property, which (if you've done it right) is worth much more than you loaned.

Interesting.  Thanks for the info.  I was talking to my mortgage broker, and in Canada, I guess it can get quite costly to foreclose on a property.  Most of the private lending goes towards riskier mortgagees, who can't get regular bank mortgages (low money down, or unproven income).