Author Topic: Case Study: Buy a House or Keep Renting?  (Read 5291 times)

cowbellfever123

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Case Study: Buy a House or Keep Renting?
« on: November 29, 2014, 07:02:52 PM »
Hello -

I would bet this question has been asked in various forms quite a bit here, so I'll keep it brief. I'm also happy to look over previous threads if you are aware of a similar situation being discussed elsewhere.

My wife and I are currently trying to decide if we should keep renting a house, or begin looking for one to buy. We have two kids under 3, so apartment living in our area isn't a great option.

We are currently paying 1,200/mo to rent the house we are in. This house is on the market, and we are not interested in buying it. Thus, we will likely have to move when our lease is up either way (not a big deal).

We live in Michigan. My wife stays home and does some side jobs, so our household income is 55,000ish/year.

I have one student loan: 11,600 at 4.5%

My wife has three loans: 14,000 (6.7%), 15,000(5.7%), and 8,000 (several loans together) respectively


Other than that, we have no credit card debt or car debt. We have a small emergency savings (about 1,500) and just started a Target Retirement account with Vanguard.

The question is, given our situation, should we be looking to save for a downpayment, and buy a house in the $100,000 - $120,000 range? This would likely make our monthly housing expenses a little lower than they are now. However, our major concern is that we have so much monthly income locked up in loans that we'll have a hard time making emergency (or even non-emergency) repairs to the house. We don't want to buy a house as soon as we're technically able, only to end up taking on debt to buy a new furnace or something.

We can likely find a house to rent that is a little cheaper than the one we are in now. But we also would like to make at least some of that money work for us through equity, instead of simply paying it to the landlord.

Any advice/feedback on what's better for our financial future is appreciated!

wwweb

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Re: Case Study: Buy a House or Keep Renting?
« Reply #1 on: November 29, 2014, 07:48:19 PM »
Here is my quick look at the numbers making some rough guesses

If you keep renting you pay...
$14400 / year in rent

You also have to deal with landlords, moving, etc.


If you buy a $120,000 home you might pay...
$4000 / year in maintenance
$6000 / year in loan interest
$2000 / year in property taxes
or about $12000 / year in home related expenses

You lose some flexibility in an emergency (e.g. it's harder to move if you lose your job), and you will need to make a large down payment which you could otherwise invest.


So just looking at my wild guess numbers the situation comes out about equal for renting vs. buying.  The intangibles (e.g. flexibility) probably matter more than the fixed costs.  If I were in your shoes I would keep renting, pay down your student loans, save up a more  substantial emergency fund (>$10,000) then revisit the question in a few years when you aren't worried about cash flow.



Another Reader

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Re: Case Study: Buy a House or Keep Renting?
« Reply #2 on: November 29, 2014, 08:11:06 PM »
In your shoes, I would pay off those high interest student loans before I thought about taking on a mortgage.  Those loans are a huge drag on your ability to save and invest.  Why don't you post a full case study, showing all of your income and expense?  My guess is you are going to have a tough time saving anything significant with the loan payments and your other expenses on less than $4,500 a month in gross income. 

DCJrMustachian

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Re: Case Study: Buy a House or Keep Renting?
« Reply #3 on: November 29, 2014, 11:26:27 PM »
Pay down the >5% loans, and put together your 25k... then, if you think you'll be in the same place for more than 5 years, you can look at the market.   You'll come out ahead owning your own house in the long run, but for now you're going to be better off renting.
« Last Edit: November 29, 2014, 11:44:39 PM by DCJrMustachian »

alsoknownasDean

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Re: Case Study: Buy a House or Keep Renting?
« Reply #4 on: November 30, 2014, 04:13:48 AM »
Agreed with the others, best find a cheaper place to rent and tackle the loans. Currently about $2000 a year of your after tax income is going towards interest alone.

cowbellfever123

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Re: Case Study: Buy a House or Keep Renting?
« Reply #5 on: November 30, 2014, 10:32:37 AM »
Thanks to those who have replied!

So far, your initial thoughts are pretty in line with what we were assuming. We take home around $4,500/month. Our minimum for student loan payments is $560/month. We do pretty well with gas (120/month) and groceries (300ish/month), etc. So housing and loans are the two areas we are examining critically right now, and I am glad to see your thoughts are in line with my initial impressions. I just hate the idea of saving for a downpayment, which means we have to keep making minimum payments for another 6-months/year.

I know paying off the high interest loans saves the most money overall. But is it a better idea to pay the smaller loans first to free up more cash faster - i.e. the Ramsey "snowball" method?

Thanks again!

TerriM

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Re: Case Study: Buy a House or Keep Renting?
« Reply #6 on: November 30, 2014, 10:40:50 AM »
Depending on how the RE market is in your area, you might not want to buy right now anyways.  Due to the low bank-interest rates and the low mortgage rates, some areas are experiencing a bubble.   You could look at Trulia's Market Trends for your city/zip to see what the stats are for your area.  Is there a rise starting in about 2010 or does it look flat, or is it still down from the 2000-2009 housing prices?

DCJrMustachian

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Re: Case Study: Buy a House or Keep Renting?
« Reply #7 on: December 09, 2014, 01:26:58 AM »
I just hate the idea of saving for a downpayment...

It sucks, but if you don't have the 20% down, they nick you for higher loan rates and "homeownership" costs.  You'll pay two mortgages, including a much higher rate on the first 20%

The most insulting extra cost is called "mortgage insurance".  It is insurance you pay to protect the bank against you not paying your own bill.  And the money you pay goes to insurance company operating costs, advertising, and profits on top of what they would pay the bank for the cost of foreclosing on you to kick you out of your house.

theadvicist

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Re: Case Study: Buy a House or Keep Renting?
« Reply #8 on: December 09, 2014, 04:22:07 AM »
In the minority here, but personally I would buy.

House prices here are starting to go up again, so look at the area you are interested in and see if you think you can get a good price if you buy now, or if you'll do better by waiting.

I prefer my money going to a mortgage, because the sooner I started it, the nearer I am to the 25 year end (and with overpayments, I'm bringing that date of freedom from 'housing costs' closer).

Regarding maintenance, we bought a derelict house in 2009. By doing everything ourselves, and using second hand stuff (a bathroom suite my aunt was having replaced) a carpet my parents were tearing out that we refitted) we made it perfectly liveable for about 500. It's really cold, but oh well, I put another layer on.

The furnace failing wasn't an issue because we don't have one. The roof leaks a little, but we are saving up to do all the work necessary at once, using cash.

So my perspective is that I'm happy to have a bit of hardship so that in the end I get the house I want for less than it's market value (purchase price + eventual cost of work < finished value).

And 'house maintenance' costs can be significant, yes, but they also are, like most other expenses, more flexible than people think. Remember, everyone else buys a car on credit. When you are told a roof is good for 5 years and then MUST be replaced, do your due diligence and make sure they're not just telling you what -they- want to hear.

Also, fixing furnaces is fun and a good skill to have. We have only needed an actual professional for one job - putting lead on the roof leak because I didn't want my husband to go up a ladder that high. Everything else - electrical work, plumbing, decorating we have done ourselves, and from my experience, if you buy raw material from independent merchants, it is very cheap.

Big box stores (here B & Q) get you by making raw timber cheap, and then charging you 100x the going rate for screws. They get you in the store with headline low rates, but then when you need an outlet cover they are 4.99 each, instead of 60p. Shop around - they get you on the incidentals.

And note -  we don't have kids.



Janie

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Re: Case Study: Buy a House or Keep Renting?
« Reply #9 on: December 09, 2014, 04:26:46 AM »

EDSMedS

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Re: Case Study: Buy a House or Keep Renting?
« Reply #10 on: December 09, 2014, 04:34:47 AM »
Are you planning on living in the same area for >5 years? Are your jobs secure? Are you optimizing your budget (hair on fire!)? My answers are no/no/yes(ish), so we will continue to rent.

If you are all yes, I recommend buying WHEN 1) loans are paid off (btw, pay more than the minimum if possible), 2) you have a 20% down payment prepared, 3) you have >3mo expenses saved. Until that point, buying risk outweighs reward.

Mr. Frugalwoods

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Re: Case Study: Buy a House or Keep Renting?
« Reply #11 on: December 09, 2014, 06:07:09 AM »
Buying is often the right choice if you:

- Plan to stay in the house for more than 5 years
- Have no other loans
- Are handy and can do basic maintenance yourself
- Have enough cash cushion to weather emergency repairs

Sounds like you need to concentrate on the loans for now.  Paying them off is an excellent rate of return!  And it's so satisfying!

Then save up a 20% downpayment + 1 year of living expenses.

Then think about buying.

rmendpara

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Re: Case Study: Buy a House or Keep Renting?
« Reply #12 on: December 09, 2014, 11:47:47 AM »

The question is, given our situation, should we be looking to save for a downpayment, and buy a house in the $100,000 - $120,000 range? This would likely make our monthly housing expenses a little lower than they are now. However, our major concern is that we have so much monthly income locked up in loans that we'll have a hard time making emergency (or even non-emergency) repairs to the house. We don't want to buy a house as soon as we're technically able, only to end up taking on debt to buy a new furnace or something.

We can likely find a house to rent that is a little cheaper than the one we are in now. But we also would like to make at least some of that money work for us through equity, instead of simply paying it to the landlord.

Any advice/feedback on what's better for our financial future is appreciated!

Bold above is the major reason I would hold off on buying for another year. I think early 2016 would be a great time since you can probably work down some of your loans by that time and free up your budget.

Given your loans are 5%+, I'd pay those down before taking on additional debt. At 55k, a few hundred dollars makes a big difference per month, so that would be my major concern.

The benefit of owning is not a short term benefit. It is a long term benefit. Delaying that by 1-2 years is not a bad thing.

A home is a place to live, not an investment.

mozar

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Re: Case Study: Buy a House or Keep Renting?
« Reply #13 on: December 09, 2014, 06:27:44 PM »
I wouldn't worry about buying until your oldest is going to start first grade. You don't want to buy and then have to move because of the school system.