Author Topic: How strongly to weigh "building equity" as a reason for buying over renting?  (Read 14379 times)

HappyHoya

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My SO and I currently rent a 1 BR apartment that we love. It's ample space for us and our dog, has a secure parking garage where our car insurance discount (compared to paying more for street parking) makes up for the cost of parking. It's a newer building and our utility bills are much lower than comparable older apartments we've lived in, even though we can't make a lot of alterations to make it more energy efficient. The location allows me to walk to work and him to bike or take the bus. We live within 2 blocks of a grocery store and hardware store, which satisfies 99% of our shopping needs. We've been earmarking part of our savings for a down payment, and are in a financial place where we could afford to put a large down payment on a condo in our area (although, not a comparable condo, more on this later). We keep feeling pressure to buy. A lot of it seems to come from self-interested parties (articles citing to realtors or builders about how it's better to buy), so I take it with a grain of salt. However, my SO is very concerned that we are losing out on the chance to build equity, and feels like rent is throwing money away. I am more interested in keeping our monthly expenses low, and the risk of having something suddenly go wrong and demanding a lot of cash is terrifying to me. In our area, we could afford a comparably-sized apartment, but it would almost certainly be much older, and we'd have to put a lot of money into getting it up to the energy efficiency of our current apartment, or we'd have to spend a lot more in utility bills. I also don't know what to make of HOA/condo fees, which can vary significantly year to year, and seem to tie our financial decisions in with a lot of other people we don't know yet. We know of friends in our city who've had unexpected increases of hundreds of dollars to their condo dues because the majority of the condo residents decided they wants a mural on the building (and other things equally non-essential). I also don't feel confident that our area is going to continue to be as expensive as it is, or that our home's value will increase before we'd want to leave. My SO and I agree on all the facts, but he weighs building equity heavily so he's still convinced buying is the right way to go. I am much more of the opinion that a home is merely a place to live, not an investment. I am not really an investor, and very risk-averse. Am I being paranoid and short-sighted?

grmagne

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Since you're in a perfect location already, I'd recommend living in your current apartment and maximizing your savings each month.

Being risk-averse, I'll assume that you don't want to invest your savings into the stock market.  An alternative idea would be purchasing a home that you rent out and then you could use your rental income to pay down the mortgage.  That would allow you to keep your ideal apartment, build equity and get a steady rate of return without the risk of stocks & mutual funds.

beltim

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HappyHoya,

The best advice is to simply use a calculator for the two properties under consideration to have an accurate monetary comparison.  If renting is more advantageous, you don't have to do anything else.  If ownership is better from a strictly financial point of view, then you can figure out the other factors involved in making a decision.

HappyHoya

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HappyHoya,

The best advice is to simply use a calculator for the two properties under consideration to have an accurate monetary comparison.  If renting is more advantageous, you don't have to do anything else.  If ownership is better from a strictly financial point of view, then you can figure out the other factors involved in making a decision.

What time frame would you suggest for this comparison? The time frame we look at makes the difference between renting and buying, in our calculations. Renting keeps our expenses low in the short term, but (depending on how much we put down and the exact selling price of the property) buying is financially advantageous after 6-8 years. My concern is that, in the time it would take us to live in an owned property and start having it make sense, it's easy to imagine something happening that would change our calculation and potentially make buying more expensive (taxes go up, HOA fees go up, something we can't fix ourselves breaks, etc., especially since the condos on the market in our price point are in older properties (1920-1960s).  We have done the calculations but there's a lot math cannot account for, and I guess that's what's holding me back. It's not just about what building equity is worth, it's the balancing of building equity verses preparing for the unexpected.

KMMK

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I think the common conception of "building equity" is generally for people who aren't good at saving money. Some people need the forced savings plan that comes with home ownership. I get the impression that you are good at renting and still savings lots of money. So I'd stop thinking of it as building equity and think about it as increasing your net worth. If you bought a condo how much money would go to increasing your net worth (amount towards the principle + other investments) vs when you are renting? (investments only). There is always the unknown factor of all investments, condo included of how much the value will go up or down over a given time frame. So, as you know, the shorter the time frame the riskier things can be. It sounds like you currently have the perfect living situation, so I'd be hesitant to buy just to "build equity", when you are doing essentially the same thing just by saving money, except in a more liquid manner. Do you track your net worth? If not, it would be useful to start. If you can show your SO how your financial situation is improving even while renting he may be more convinced. When I was recently thinking about renting vs buying (we did chose to buy just last month) I did some comparison spreadsheets of the affect of buying vs renting on net worth. It ended up that our net worth would be about the same either way, but buying might delay our retirement because we'd have less in the way of income producing assets. For a while, we did plan to rent indefinitely, and retire early without owning a property, but have lately changed our minds due to lifestyle, rather than financial considerations.

lentilman

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If you love your current arrangement you should weigh that heavily in the decision.  There are many good reasons to buy a house, but investing isn't one of them.

Here is a nice post from Jim Collins: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment

Another Reader

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You sort of answered your own question.  You can't afford to buy a condo equivalent to the apartment you are renting.  Therefore the rent vs buy calculator for the unit you want, one that is similar in location, efficiency, and age to what you have now, is going to show it is cheaper to rent.

However, I think the most convincing argument  is to calculate the difference between the PITI payment plus HOA for an equivalent condo and your rent plus the down payment and closing costs. Then run an investment scenario where that difference is invested in paper assets.  I think in your case you will build more "equity" in stocks and other paper assets, than by investing in an equivalent condo.  And that will probably hold true even after the tax benefit, if you can use that deduction.

beltim

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HappyHoya,

The best advice is to simply use a calculator for the two properties under consideration to have an accurate monetary comparison.  If renting is more advantageous, you don't have to do anything else.  If ownership is better from a strictly financial point of view, then you can figure out the other factors involved in making a decision.

What time frame would you suggest for this comparison? The time frame we look at makes the difference between renting and buying, in our calculations. Renting keeps our expenses low in the short term, but (depending on how much we put down and the exact selling price of the property) buying is financially advantageous after 6-8 years. My concern is that, in the time it would take us to live in an owned property and start having it make sense, it's easy to imagine something happening that would change our calculation and potentially make buying more expensive (taxes go up, HOA fees go up, something we can't fix ourselves breaks, etc., especially since the condos on the market in our price point are in older properties (1920-1960s).  We have done the calculations but there's a lot math cannot account for, and I guess that's what's holding me back. It's not just about what building equity is worth, it's the balancing of building equity verses preparing for the unexpected.

The time frame you want to use is how long you expect to be in the purchased condo.

Yes, there's lot of unknowables, and you're doing a good job asking the right questions.  You should be able to get estimates (although maybe with a large margin of error) for the possibility of taxes going up, something breaking (maintenance should definitely factor into your calculations), and even HOA fees (ask what they've been for the last 10-20 years, and what special assessments have occurred or might occur in the future as well).

There's no way to no the future perfectly, so you have to use the best data you have and go from there.  If things like paying for something that breaks that you don't know how to fix terrifies you, that should go into your decision calculus as well.  Peace of mind is worth a great deal of money.

HappyHoya

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Thanks for the advice, everyone. I especially appreciated the article about homes not being good investments. Since we may eventually move to a less expensive area to get closer to FI (no plans to leave current jobs, but they are not forever), I suspect we will continue to rent for now. We're going to run the numbers for specific properties, and have a serious talk about how long we are committed to living in this area.

lsalinas

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Yes, definitely figure out how long you expect to be in the area.  I would only buy a house if I knew for sure that I was going to live there for decades.  If bought something and then decided I wanted to move but couldn't sell it or had to find renters, it would stress me out a ton!  One woman in my office couldn't sell her house and couldn't get enough rent or continuous renters to cover the mortgage, so after 2 years she and her husband had to go leave their new jobs and go back to their old house. 

Also think about how stable your jobs are.  I was laid off and only took 3 months to find a better job because I was able to move to where the jobs were.  Some colleagues were unemployed for over a year because they were constrained by their geography because they owned homes.  I am in middle management so I expect that might not be the last time I am laid off!  I also have found that apartments have allowed me to live in nicer areas than I could live in if I had to own.   

When my husband and I were dating we were both home owners.  We unloaded both houses in late 2006 before the market tanked and we never looked back.  We are still thrilled that every time we have a problem we can call the landlord to take care of it all. 

This_Is_My_Username

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However, my SO is very concerned that we are losing out on the chance to build equity, and feels like rent is throwing money away.

I used to think this way, but it is wrong.

Consider four scenarios:

(1) You rent a $200k house for $200 per week.

(2) You own a $200k house with $200k owing, and pay $200 a week in Interest.

(3) You own a $200k house outright, with $0 owing.  You lose $200k per week in opportunity cost of having $200k tied up in that building.  If you moved back in with your parents (free accommodation), you would receive $200 per week from a tenant.  If you moved back in with your parents and sold the house, you would receive $200 per week in dividends from your $200k of shares.

(4) You own a $200k house with $50k owing, and $150k of ownership.  You pay $50 a week in interest, and "lose" $150 per week in opportunity cost.

Therefore: Rent is not "throwing money away".  That sentiment is a marketing scam, similar to the price of diamonds.  renting and owning both require "rent" to be paid.


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now, rent or buy, that is a very simple question from a financial perspective.  (there are also emotional considerations)


1. Chooose a house.
2. Discover the annual rent: $X
3. Discover the Price - multiply by entire price by the current mortgage interest rate.  Add mortgage fees, add Body Corporate (HOA) fees, add land tax, rates, repairs, maintenance, etc.  Add an annualised amount for transaction fees (stamp duty), and agents fees.  This = Y.
4. Ignore capital gains.  If you rent and invest in shares, you will also get capital gains.

If X>Y, buy.  If Y>X, rent.

This_Is_My_Username

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I think the common conception of "building equity" is generally for people who aren't good at saving money. Some people need the forced savings plan that comes with home ownership. I get the impression that you are good at renting and still savings lots of money. So I'd stop thinking of it as building equity and think about it as increasing your net worth. If you bought a condo how much money would go to increasing your net worth (amount towards the principle + other investments) vs when you are renting? (investments only). There is always the unknown factor of all investments, condo included of how much the value will go up or down over a given time frame. So, as you know, the shorter the time frame the riskier things can be. It sounds like you currently have the perfect living situation, so I'd be hesitant to buy just to "build equity", when you are doing essentially the same thing just by saving money, except in a more liquid manner. Do you track your net worth? If not, it would be useful to start. If you can show your SO how your financial situation is improving even while renting he may be more convinced.


spot on, Kestra.  'building equity' is a clever way to trick non-mustachains in to saving money.

It doesn't look like HappyHoya needs to be tricked in to saving money.

iris lily

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I think the common conception of "building equity" is generally for people who aren't good at saving money. ...


spot on, Kestra.  'building equity' is a clever way to trick non-mustachains in to saving money.

It doesn't look like HappyHoya needs to be tricked in to saving money.

right, I think the OP is very wise to examine the standard line about building equity.

I have a house because I've got a lot of dogs, we want a garden, I want to paint the walls the color I want. We are also building equity and that is fine. But--think out of the box, be disciplined in savings, and you will be fine.

willn

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now, rent or buy, that is a very simple question from a financial perspective.  (there are also emotional considerations)


1. Chooose a house.
2. Discover the annual rent: $X
3. Discover the Price - multiply by entire price by the current mortgage interest rate.  Add mortgage fees, add Body Corporate (HOA) fees, add land tax, rates, repairs, maintenance, etc.  Add an annualised amount for transaction fees (stamp duty), and agents fees.  This = Y.
4. Ignore capital gains.  If you rent and invest in shares, you will also get capital gains.

If X>Y, buy.  If Y>X, rent.

Hmm.  Help me out as it seems that your x>y doesn't account for the ownership interest you have at the end of the ownership period though.

In other words, if the price of rent is 1k/month compares to the (total) cost of buying for 1K/month, you don't get any extra capital renting, but you do by buying...

arebelspy

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New York Times Buy vs. Rent Calculator solves all of the issues raised by letting you put in your own assumptions for various market returns, equity growth in the house, etc.

http://www.nytimes.com/interactive/business/buy-rent-calculator.html
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This_Is_My_Username

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now, rent or buy, that is a very simple question from a financial perspective.  (there are also emotional considerations)


1. Chooose a house.
2. Discover the annual rent: $X
3. Discover the Price - multiply by entire price by the current mortgage interest rate.  Add mortgage fees, add Body Corporate (HOA) fees, add land tax, rates, repairs, maintenance, etc.  Add an annualised amount for transaction fees (stamp duty), and agents fees.  This = Y.
4. Ignore capital gains.  If you rent and invest in shares, you will also get capital gains.

If X>Y, buy.  If Y>X, rent.

Hmm.  Help me out as it seems that your x>y doesn't account for the ownership interest you have at the end of the ownership period though.

In other words, if the price of rent is 1k/month compares to the (total) cost of buying for 1K/month, you don't get any extra capital renting, but you do by buying...

The calculation of the buying cost should be interest-only.

repayment of principal is actually savings, (or investment in property).

When renting, an equivalent amount would be invested in shares.

SnackDog

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Tell him that building equity means sinking his savings into an underperforming investment. It means tying up a great wad of cash in a very illiquid manner. Tell him buying means owning which means modest to large maintenance costs and potentially unlimited liability. The longer you own, the worse this all gets.

CopperTex

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I currently own but would love to rent one day just for the savings on maintenance, taxes, insurance, etc. but how do you combat the argument that a home mortgage will stay the same for 30 years which at this point you no longer have a mortgage vs. rents that increase 3% each year with inflation for the rest of your life?

willn

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now, rent or buy, that is a very simple question from a financial perspective.  (there are also emotional considerations)


1. Chooose a house.
2. Discover the annual rent: $X
3. Discover the Price - multiply by entire price by the current mortgage interest rate.  Add mortgage fees, add Body Corporate (HOA) fees, add land tax, rates, repairs, maintenance, etc.  Add an annualised amount for transaction fees (stamp duty), and agents fees.  This = Y.
4. Ignore capital gains.  If you rent and invest in shares, you will also get capital gains.

If X>Y, buy.  If Y>X, rent.

Hmm.  Help me out as it seems that your x>y doesn't account for the ownership interest you have at the end of the ownership period though.

In other words, if the price of rent is 1k/month compares to the (total) cost of buying for 1K/month, you don't get any extra capital renting, but you do by buying...

The calculation of the buying cost should be interest-only.

repayment of principal is actually savings, (or investment in property).

When renting, an equivalent amount would be invested in shares.

Got it. Didn't notice you weren't including the principal in the home buying cost, make sense. Don't forget to include rent increases in the cost or renting.


Phoebe

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I currently own but would love to rent one day just for the savings on maintenance, taxes, insurance, etc. but how do you combat the argument that a home mortgage will stay the same for 30 years which at this point you no longer have a mortgage vs. rents that increase 3% each year with inflation for the rest of your life?

I've heard Suze Orman mention this when giving advice on her show and it got me curious as well.  My guess is that even when you own your home outright property taxes, insurance, maintenance, utilities, etc. all go up with inflation as well so it balances out?  But I've never owned a home and would love to hear other people's opinions.

SnackDog

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I currently own but would love to rent one day just for the savings on maintenance, taxes, insurance, etc. but how do you combat the argument that a home mortgage will stay the same for 30 years which at this point you no longer have a mortgage vs. rents that increase 3% each year with inflation for the rest of your life?

I've heard Suze Orman mention this when giving advice on her show and it got me curious as well.  My guess is that even when you own your home outright property taxes, insurance, maintenance, utilities, etc. all go up with inflation as well so it balances out?  But I've never owned a home and would love to hear other people's opinions.

It does not balance out because all that money you have poured into a house could have been invested and earning you inflation PLUS 4-5 percentage points.   After 30 years your investment would have been worth a great deal more than your house (which rose in value at the rate of inflation).  This investment will easily pay for rent and rent inflation, because it will appreciate in value faster than inflation.  As a matter of fact, you could wait 30 years, then pay cash for the house (no mortage) and still come out financially way ahead of paying as you go.

beltim

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It does not balance out because all that money you have poured into a house could have been invested and earning you inflation PLUS 4-5 percentage points.   After 30 years your investment would have been worth a great deal more than your house (which rose in value at the rate of inflation).  This investment will easily pay for rent and rent inflation, because it will appreciate in value faster than inflation.  As a matter of fact, you could wait 30 years, then pay cash for the house (no mortage) and still come out financially way ahead of paying as you go.

This is just as ignorant a view as "renting is throwing money away."  The fact is, there isn't always one answer.  Sometimes renting is better and sometimes buying is better.

Exflyboy

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HOA fees.. ACK!... Even the mention of them brings me out in hives!

I will NEVER pay them.. EVER!

chasesfish

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It's a simple financial decision, your cost of housing is what are your cash outlays, less principal paid, then compare the two.

Remember maintenance is at least 1% of the houses value each year, and I'd say 2% for houses over 20 years.  Don't forget taxes, insurance, hoas, yard costs, an other recurring servicing needed for your area (HVAC, pests)

dodojojo

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I rent a one bedroom in one of the nicest and super-convenient towns in my metro area.  It also means it's very expensive to buy.  Single family homes usually start at seven figures.  The ones that sell for less than a million usually are torn down and make way for brand new houses (or more accurately, mansions).  The cheapest one bedrooms go for about 275K, the average for about 350K and new ones for 400-550K. 

I looked at an old condo this summer for 275K.  Old as in the hallway closet door no fit in the doorway and wouldn't close. PITA with condo fees was about $2,100 monthly (I only had 10% for a downpayment).  My rent with utilities is about $1,350.  Moving out of the super convenient neighborhood for a small house would cost about $1,500-1700.  I would also have to add in expenses for a car or more car rentals/public transportation.

So I'm still renting.

This_Is_My_Username

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I currently own but would love to rent one day just for the savings on maintenance, taxes, insurance, etc. but how do you combat the argument that a home mortgage will stay the same for 30 years which at this point you no longer have a mortgage vs. rents that increase 3% each year with inflation for the rest of your life?

If you own a house outright with no mortgage, you are paying "implied rent", by having $x00,000 'locked up' and providing $0 income.

Forcus

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Came in late on this one, but as a "victim" of the building equity statement, it was the worst financial decision I could have made.

Rented nice 1 bedroom appt. with two carports close to work for $425/mo. Expenses less than $50 for utilities, garbage, water, etc. included, $10 for renter's insurance so net outlay $485/mo.

Bought house around 2006 for $105k at high interest rate (7.25%) for around $1,000/mo. including property tax and home insurance.
Average utilities $300/mo (very inefficient house), garbage $20/mo, water/sewer cheap at $45/mo., total around $365/mo.
Average repairs around $150/mo plus new roof (7k) and HVAC system (4k) so total average of $280/mo.
House is now worth maybe $85,000 after realtor fees so net cost per month is ((105k-84k)/84) = $250/mo. (that's that supposed equity... just negative)
Total monthly outlay $1895/mo.

SO:
Total cost of ownership for apartment would have been 84 mo. x $485 = $40,740
Total cost of ownership for house has been 84 mo. x $1895 = $159,180

I would have saved $118,440 by not "building equity" and by staying with my apartment that met my needs (and still would). This also does not include my commuting time and costs - which went from around 5 miles / 20 minutes round trip to 70 miles / 90 minutes round trip at one point. We'll just call it an even $150k I lost building equity.

Do the math and see what makes sense but if you love the apartment... I'd call it a day.

SnackDog

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Plus if you had stayed in the apartment and invested the difference in an index, it would have returned nearly 37% over the past seven years (dividends reinvested), so you would have been even farther ahead renting, even if the house had appreciated at inflation of 3%.

Forcus

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Plus if you had stayed in the apartment and invested the difference in an index, it would have returned nearly 37% over the past seven years (dividends reinvested), so you would have been even farther ahead renting, even if the house had appreciated at inflation of 3%.

Yep, I didn't include that part (or calculations on the commute, hobby expansion due to the newfound space). I'd say overall including the above I'm out (theoretically) around $200k. or ~7-8 years of early retirement. In other words, for the 7-8 years I got to live in this hole of a house, I added 7-8 years before retirement. Live and learn.

geekette

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Every place I've seen that's rented looks like a rental (i.e. crap).  Our house looks just the way we want it to look (i.e. not crap). 

Worth it for me. 

HappyHoya

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Every place I've seen that's rented looks like a rental (i.e. crap).  Our house looks just the way we want it to look (i.e. not crap). 

Worth it for me.

Do you mind elaborating more on your standards for what's "crap?" There are a few alterations I could see wanting to make to a home that we owned, but I don't think that makes our rental crap. Our rental has granite counter tops (I'm not a huge fan, but perceived as fancy) and more expensive finishes than we would likely get in almost any home we could buy at a comparable expense. Of course, we would have the freedom to change the home we owned, but at an additional expense.

Forcus

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Worth it for me.

And that's fine as long as you recognize the trade-offs. I was naive about the true costs of owning a home, bought in to the American Dream / building equity nonsense, and when you look at the math not only was building equity not achieved, I lost quite a bit in opportunity cost. If I had known that, I wouldn't have made the move. Others still would have, and that's fine, as long as you know whats at stake.

Mae80s

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Just have to say thanks for posting this and for the replies.

I'm in a similar situation. We're paying $1190 (including heat and hot water) for a one bedroom 700 sf apartment. If said apartment were a condo, it would be $350-400K, then add property taxes, condo fees ... and well buying is not a good investment.

The problem is wanting to have a family soon and then the cost vs. renting becomes tricky. I also think Canada is in the midst of a housing bubble, so I'm nervous to buy in.

HappyHoya

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Just have to say thanks for posting this and for the replies.

I'm in a similar situation. We're paying $1190 (including heat and hot water) for a one bedroom 700 sf apartment. If said apartment were a condo, it would be $350-400K, then add property taxes, condo fees ... and well buying is not a good investment.

The problem is wanting to have a family soon and then the cost vs. renting becomes tricky. I also think Canada is in the midst of a housing bubble, so I'm nervous to buy in.

I'm the original poster and our situation is similar. Although our rent is slightly more per month if you include utilities, the purchase price of a comparable home is proportionately more, too. We are in Washington, DC, which I also fear is experiencing a bubble. Maybe not "fear," since I'm not vested in it, at the moment, but it's continued to experience record low inventories and high prices, despite what's going on in the rest of the US. While I wouldn't mind living here for long enough to pay off the mortgage, this forum has helped me and DH see that there are also other places we could live the way we want to (walking to work, community-focused, free entertainment, etc.).

geekette

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Every place I've seen that's rented looks like a rental (i.e. crap).  Our house looks just the way we want it to look (i.e. not crap). 

Worth it for me.

Do you mind elaborating more on your standards for what's "crap?" There are a few alterations I could see wanting to make to a home that we owned, but I don't think that makes our rental crap. Our rental has granite counter tops (I'm not a huge fan, but perceived as fancy) and more expensive finishes than we would likely get in almost any home we could buy at a comparable expense. Of course, we would have the freedom to change the home we owned, but at an additional expense.

Well, crap is in the eye of the beholder (I don't like granite either).  I recently went rental "shopping" for, and then with, my sis-in-law, and there was nothing I would have considered renting.  She's fine with what she got, but everything looked beat up and cheap.   

Worth it for me.

And that's fine as long as you recognize the trade-offs. I was naive about the true costs of owning a home, bought in to the American Dream / building equity nonsense, and when you look at the math not only was building equity not achieved, I lost quite a bit in opportunity cost. If I had known that, I wouldn't have made the move. Others still would have, and that's fine, as long as you know whats at stake.

Yup.  But I think we've done okay.  Been here 20 years, and still love the house.  It's been paid off for a good while.  I'm not sure how to compute opportunity cost - it was $163k in '93, and as of now is worth probably $250k at best.  Taxes/insurance/etc run $300/month.  Rental on a half a duplex that's about half the size of our house is $1k/month (sis-in-law's place). 


dodojojo

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 We are in Washington, DC, which I also fear is experiencing a bubble. Maybe not "fear," since I'm not vested in it, at the moment, but it's continued to experience record low inventories and high prices, despite what's going on in the rest of the US. While I wouldn't mind living here for long enough to pay off the mortgage, this forum has helped me and DH see that there are also other places we could live the way we want to (walking to work, community-focused, free entertainment, etc.).



Ah, your forum name should have pinged with me ;)  Getting my degree there was the most Un-mustachian thing I have ever done.  Luckily I didn't top that decision by buying a house this summer.

HappyHoya

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 We are in Washington, DC, which I also fear is experiencing a bubble. Maybe not "fear," since I'm not vested in it, at the moment, but it's continued to experience record low inventories and high prices, despite what's going on in the rest of the US. While I wouldn't mind living here for long enough to pay off the mortgage, this forum has helped me and DH see that there are also other places we could live the way we want to (walking to work, community-focused, free entertainment, etc.).



Ah, your forum name should have pinged with me ;)  Getting my degree there was the most Un-mustachian thing I have ever done.  Luckily I didn't top that decision by buying a house this summer.

Hello, fellow Hoya! I am still torn about the value of my degree (recently went on a rant about it on the Student Debt Poll thread). On the one hand, I probably never would have gone to graduate school if I'd found this forum first. On the other hand, it sure is nice to make 300% more and not have to take nearly as much degrading crap from employers. Living on a student budget for so long definitely helped strengthen our frugality muscles (at least in terms of living expenses, obviously not for the cost of tuition), so I am hoping we can dig ourselves out of debt quickly.

If you don't mind me asking, did you almost buy a house in DC? Based on what you said before about your metro area, it seems plausible (not trying to be stalky, just trying to get a sense of other peoples' experience with the DC market). Someone needs to start a blog about how ridiculous DC real estate is. This past spring, when inventories were at their lowest, a realtor brought us to a $550k basement condo where neither the owners nor the selling agent made any effort to cover up the fact that it had an obvious mold problem (visible in every corner and along some walls), and the "2nd BR/Den" was clearly a pantry/storage area off the kitchen with no windows and no temperature control. When I mentioned that it wouldn't even fit a twin sized bed it in, the agent said, "A crib would fit!", as if anyone would ever put a child in that non-room! That condo ended up getting multiple bids and going for more than the asking price! When we compare that to our rent, which is kept low/constant by the multitude of apartment buildings going up in our neighborhood, it's so difficult to buy into the "buying is better" mindset. Not to mention that the city has extremely tenant-friendly policies. We're meeting with a financial adviser on Monday to get some concrete numbers together so we can do the math, but I can't imagine that buying will end up making sense.

If you ended up leaving the DC area, I'd be interested to know that, too, and how you felt about it.

Eric

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Someone needs to start a blog about how ridiculous DC real estate is. This past spring, when inventories were at their lowest, a realtor brought us to a $550k basement condo where neither the owners nor the selling agent made any effort to cover up the fact that it had an obvious mold problem (visible in every corner and along some walls), and the "2nd BR/Den" was clearly a pantry/storage area off the kitchen with no windows and no temperature control. When I mentioned that it wouldn't even fit a twin sized bed it in, the agent said, "A crib would fit!", as if anyone would ever put a child in that non-room! That condo ended up getting multiple bids and going for more than the asking price! When we compare that to our rent, which is kept low/constant by the multitude of apartment buildings going up in our neighborhood, it's so difficult to buy into the "buying is better" mindset. Not to mention that the city has extremely tenant-friendly policies. We're meeting with a financial adviser on Monday to get some concrete numbers together so we can do the math, but I can't imagine that buying will end up making sense.

You may enjoy my recent housing price rant for the SF Bay Area:

https://forum.mrmoneymustache.com/off-topic/bay-area-rental-prices-an-explitive-filled-rant/

Ridiculous real estate markets unite!

dodojojo

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HappyHoya,

I don't want to give too much away.  I do work in DC but live just outside.  Think of one of the swishiest and most convenient neighborhoods/areas within the Beltway.  I was looking at condos in my neighborhood and then houses further out in the suburbs.  I never even considered DC--too pricey per square footage and still missing a lot of the amenities within my neighborhood.

As far as leaving--going "home" is always going to be on the horizon. Sooner or later it will happen especially as my mother grows older.  Home though is...Los Angeles and real estate prices there are even worse than DC's!

As far as the Hoya degree, I wouldn't go so far as not doing it if given a do-over, but I wish I had made some effort digging into external/alternative scholarships.  As it was,  I only received a piddling scholarship from the school.  I also should have seriously considered the state school offer. 

willn

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Has anyone mentioned that the profit on selling a house is tax free up to 250k for an individual, 500k for a couple?  If I remember, you must live in the residence 2 of the last 5 years to claim this.

Real estate is also a bit of hedge against inflation compared to renting-mortgage and principal are fixed, but rents go up with inflation. 

FinancialIndependenceTime

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However, my SO is very concerned that we are losing out on the chance to build equity, and feels like rent is throwing money away.

I used to think this way, but it is wrong.

Consider four scenarios:

(1) You rent a $200k house for $200 per week.

(2) You own a $200k house with $200k owing, and pay $200 a week in Interest.

(3) You own a $200k house outright, with $0 owing.  You lose $200k per week in opportunity cost of having $200k tied up in that building.  If you moved back in with your parents (free accommodation), you would receive $200 per week from a tenant.  If you moved back in with your parents and sold the house, you would receive $200 per week in dividends from your $200k of shares.

(4) You own a $200k house with $50k owing, and $150k of ownership.  You pay $50 a week in interest, and "lose" $150 per week in opportunity cost.

Therefore: Rent is not "throwing money away".  That sentiment is a marketing scam, similar to the price of diamonds.  renting and owning both require "rent" to be paid.

This is an excellent example of how the media tries to trick the general public into believing in something that is totally false.

citrine

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We were paying the same amount in rent as we are with our home;  however, it is all ours and we don't have a dingbat for a landlady :)  I lucked out in DH because he can build and fix anything so we have built up quite a bit of equity in our home in two years.  We live in a really sought after area, near schools, and ours is the largest corner lot for blocks.  We looked at all of that before buying, knowing we would be here for at least 10-14 years. 

This_Is_My_Username

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However, my SO is very concerned that we are losing out on the chance to build equity, and feels like rent is throwing money away.

I used to think this way, but it is wrong.

Consider four scenarios:

(1) You rent a $200k house for $200 per week.

(2) You own a $200k house with $200k owing, and pay $200 a week in Interest.

(3) You own a $200k house outright, with $0 owing.  You lose $200k per week in opportunity cost of having $200k tied up in that building.  If you moved back in with your parents (free accommodation), you would receive $200 per week from a tenant.  If you moved back in with your parents and sold the house, you would receive $200 per week in dividends from your $200k of shares.

(4) You own a $200k house with $50k owing, and $150k of ownership.  You pay $50 a week in interest, and "lose" $150 per week in opportunity cost.

Therefore: Rent is not "throwing money away".  That sentiment is a marketing scam, similar to the price of diamonds.  renting and owning both require "rent" to be paid.

This is an excellent example of how the media tries to trick the general public into believing in something that is totally false.

cheers mate :)