Author Topic: Rent vs. Buy  (Read 791 times)

Em-Dog

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Rent vs. Buy
« on: March 23, 2021, 08:51:43 AM »
I know this topic has been covered in great detail many times but I'd like some opinions on my specific case (without an entire case study).

My fiancée (29) and I (28) are currently renting in a HCOL area (CA coast) we pay $2,500 per month (includes water & trash - water is very expensive here), our commutes are both 10 min by car or 45- 1 hour bike ride (hills). We lived in cheaper places (2k and 2.25k) prior to this place but had mold problems and rat problems (I trapped over 50 rats/mice the first 6 months of living there! I started counting bc I was shocked how many I was getting) any ways slumlords are a huge problem in our area and there isn't a ton of inventory.

We've now saved a little over $100k with the plan to use that as a down payment in the near future. Houses in the area we currently live are about $800k for the smallest most outdated place you can find, but if we move 15 miles farther from work (still bikeable, we do this ride on weekends) we can find something for $600k - this is our plan.

I just want you guys to help qa my math and make sure this makes sense. I looked at an amortization chart and see that after 5 years we'll have about $50k in equity paid and have paid about $80k in interest (ouch), however staying where we are now we'll have paid $150k in rent so I think it makes sense to make this move. Obviously the longer we live there past 5 years the gains compound, I'm just nervous about making such a big commitment of course and I know a lot of times in a HCOL area renting makes more sense.

Thanks in advance for the wisdom and advice! We're new mustachians aiming for a 70+% savings rate!

JGS1980

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Re: Rent vs. Buy
« Reply #1 on: March 23, 2021, 09:08:15 AM »
Rent

Is your rental a similar building to your presumed purchase? If not, you are comparing apples to oranges.

If you want to purchase a home, remember that the purchase price/mortgage is not the only ongoing expenses. Property taxes, utilities, repairs (1-2% value of home per year), remodels all will greatly increase your expenses over time.

This will impact your savings rate greatly, and you do not want to be "house poor".

Then again, if you choose to spend money in this way consciously as a lifestyle choice, and believe that there will be more happiness/joy of living while going for it, then go for it!

FINate

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Re: Rent vs. Buy
« Reply #2 on: March 23, 2021, 09:34:38 AM »
Until last year DW and I lived on the CA Central Coast (Monterey Bay area), born and raised there. So I get what you're describing. We owned our home outright and yet it was still stupidly expensive after taxes, utilities, insurance, etc. Renting or carrying a mortgage makes for an even tougher nut to crack each month. I don't think there are any great options. Moving to a location you don't really want, other than for cheaper housing, isn't ideal and adds to your commute (time and higher expenses). An $800k falling apart house will wreck your finances. Yet if you keep renting long term it's highly probable that your rent will keep increasing.

That said, all things considered, my vote is to keep renting.  Although I don't know specifically what market you're in, if the "affordable" houses are $800k then you're getting a steal at $2500/month including some utilities. Just know that you may eventually be priced out. However, jumping ship as a renter is far better than taking a beating on a money pit.

I'll also suggest getting involved in your local YIMBY group. The best thing for you long-term is if the community builds a LOT more housing.

Em-Dog

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Re: Rent vs. Buy
« Reply #3 on: March 23, 2021, 09:46:22 AM »
Thank you, this is a helpful viewpoint.

The 2 properties aren't similar. We're in a 700 sq ft 2bd/1ba duplex right now. The house would be 3bd/2ba maybe 1200 sq ft. with a yard.

That's a great point, I need to factor in those costs:
property tax (based on online calculator) ~ $7.8k per year
insurance (also based on online tool) ~ $2.4k per year
utilities maybe $100 more per month over what we currently pay

So after 5 years of home ownership:
$50k equity
$80k interest paid
$39k property taxes paid
$28.8k home owners insurance
$6k utilities
= $203.8k paid = $153.8k costs and $50k equity
+ any repairs etc.

while 5 years of rent is $150k costs, no equity
(We are thinking about having kids in the next few years so may need a bigger place)

From this math it seems the cost is close but you come out with equity in the home ownership scenario. You pay more in the home owner scenario, the $50k is paying yourself back, which you're right could limit savings ability and a longer commute which is not good.

I'm not tied down to renting or buying I'd really prefer to do what is best in the long run for our finances, I figure that will give us the most happiness/joy!

FINate - thanks for the note, you hit the nail on the head we are in Monterey now and thinking about Marina. Seaside and Salinas have cheaper options too but if I buy I'd like to stay for at least 5 years and the schools are a bit better in Marina. Part of me wants to scrap the home ownership plans and throw this savings into an index fund.

FINate

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Re: Rent vs. Buy
« Reply #4 on: March 23, 2021, 10:27:24 AM »
Depending on the home, you can count on about $2k/year for maintenance, potentially a lot more if there's deferred maintenance (roof, water heater, water intrusion, etc.).
 
Although I don't know where you work, if it's within a 10 min drive of Monterey then I would avoid Salinas. That's a fairly long commute and the routes aren't awesome (looking at you hwy 68).

Marina would be a decent option, though I see a grand total of one house in your price range there and it's kinda meh. But that location is an easy bike ride to Monterey on the recreation path...by far the best way to get around in Monterey! If you end up in Marina (or Seaside) I highly recommend an electric assist cargo bike if/when you have kids.

Unfortunately the entire Monterey Bay area is within the new commute range for semi-remote tech work in Silicon Valley. E.g. for 1 day a week in the office the drive from Monterey to San Jose is very doable. I think I would keep renting because $2500 for a 2/1 is a pretty good deal, save as much as possible, and bide your time and wait for a good buying opportunity.

yachi

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Re: Rent vs. Buy
« Reply #5 on: March 23, 2021, 10:56:48 AM »
Re: having kids
We had our first baby when we lived in a 900 square foot apartment.  We were there maybe a year and a half after that.  It just was too small for us, and how we live.  I can understand wanting something larger.  I know you don't want to get into an entire case study, but here are some things that would concern me putting so much money into a house in that area:

Some areas are expensive because of specific high paying jobs in the area tech in parts of California, finance in NYC - do you have one of these jobs?  I've seen careers that would support good living conditions elsewhere in the country support relatively poor conditions in areas like these, especially if the price runup has been recent.  You're more protected

After 5 years of home ownership, you'll have 50k in equity, unless housing values fall a relatively modest 8.5%, in which case you won't have any equity.  If 5 years is the limit of how long you can stand to live in the area, then you shouldn't buy because of this risk.  If you absolutely love the area and plan on staying there forever (or to live in an area just as expensive) than it would be a better decision.  If housing prices do fall 8.5%, the house you bought in Marina would fall in value, but so might a house in Monterey you could be interested in buying.


Em-Dog

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Re: Rent vs. Buy
« Reply #6 on: March 23, 2021, 11:33:01 AM »
Very helpful points. One of my concerns with waiting and continuing to save is having my money just sitting in a savings account vs. making more money in the market. At what point do I stop accumulating and start building my market stash (I have some sitting there already, but stopped contributing to save for the house).

We have pretty good jobs, I think, which is part of the reason we're living here, a little over $200k combined before taxes. Because of my great job specifically we want to stay for a while but I know there are other options out there, in lower COL areas.

It's a great point about home values depreciating, I picked 5 years because I wouldn't want to buy something and move before 5 years but the plan would be to stay longer if possible. Our best case scenario is to buy something in Monterey and live here forever if we can, I'm just not sure that's feasible without working forever (probably still not until 65 but longer then we want)

It does seem like overall we should wait and continue saving our money.