Author Topic: I only pay $250 in rent. Would buying a house be a terrible idea?  (Read 6075 times)

megasaurus

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I'm 27 years old and have about 50k saved up in cash, and about 40k in retirement accounts. My living expenses are about 10k/yr, and I have no debt. Earlier this year, my SO and I moved in to SO's brother's house, where we only pay 500/mo in rent (including utilities), so 250 each (our finances are separate). I have the goal of early retirement, ideally in around 15 years. To meet this goal, my major concern regarding living costs is housing. Although our rent is extremely low at the moment, I anticipate in a year to year and a half (at most), we will want to get our own place. If I don't buy a house, we will of course end up renting somewhere at a higher cost. My concern is that house prices and interest rates will only continue to rise, so I will be missing my chance to lock in a lower price & rate if I wait until we need to move. Since last year it seems like houses have already gone up 10+% and a 30-yr interest rate is a full 1% higher. However, using the NYTimes rent vs. buy calculator, buying is still cheaper than renting after only a couple years, for the areas and types of houses that I've been looking at.

A few other bits of information:

-I would be buying by myself, since my SO doesn't have any savings, our finances are separate, and doesn't necessarily have the desire to buy a house at the moment (would strongly support me in doing so however), but would pay me rent (probably around 500/mo + utilities). Nevertheless I would technically be able to afford all the costs myself.

-I am looking at houses/condos ranging from around 170-240k. Mortgage (+tax & homeowner's insurance) payments in this range would be around 750-1100/mo. Equivalent rents would be 900-1400/mo. (I recognize that there are many other costs of homeownership as well).

-I'm torn between buying on the lower end of that spectrum with a 5/1 ARM at around 2.8% and buying on the higher end of that spectrum with a 30-yr mortgage. On the lower end (170-190k), I think we would only want to stay there 5-7 years at most anyway. I could save 20-30k per year to go towards paying off the mortgage in that amount of time, and/or count on selling it before or soon after the interest rate increases. On the higher end or if I stretched up to around 250k, I could see us staying for 10-15 years. Of course all this is moot if it's a dumb idea in the first place.

-Buying would also improve our living situation from what it is now, since we rent a small basement room in an older house -- we are fine with this for now, but it would be nice to improve. We would also be closer to family, and my SO's commute would decrease from 30 minutes to 5-10 minutes.

-My job is very stable.

-We plan to stay in the area indefinitely.

I know that I'm in an astonishingly good situation at the moment with housing costs. Would it be foolish of me to give this up unnecessarily, on the speculation that houses and interest rates will be significantly higher in 12-18 months?

Everyone I've talked to (family members & SO) has said it seems like a good idea, which disturbs me in that I'm not hearing the downsides. And they don't really share my perspective/goals on financial independence and early retirement, so I'm hoping you mustachians can share some insight!
« Last Edit: February 09, 2015, 06:03:39 PM by megasaurus »

CommonCents

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #1 on: November 18, 2013, 03:22:08 PM »
What does SO's brother say?  Is he willing to let you rent indefinitely or is there an expectation this is a really short term family deal?

Michread

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #2 on: November 18, 2013, 03:27:19 PM »
Do you plan to marry your SO?  Do you plan to have children eventually?  If the answer is yes to both then I would wait.  Your SO will want a place that you both own/picked.  It's cheaper to buy ONE home rather than to buy a smaller one and then move into a larger one for the SO and children.

Mr.Macinstache

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #3 on: November 18, 2013, 03:27:51 PM »
Depends on your area. They've been threatening rising interest rates for years. It aint gonna happen. Not in this QE environment. Rates should continue to be low and in most markets housing remains in good supply, and IMO are still way overpriced. Don't be in a rush to buy. Stash the cash, save and invest. Buying a house cost tons of money in interest, taxes and repair/upkeep. They aren't such a winning long term investment anymore, for the most part. Your location may be the exception though.

Here's a great postcast from a couple of great bloggers:
http://www.lewrockwell.com/podcast/222-dont-buy-a-house-and-dont-send-your-kid-to-college-2/
« Last Edit: November 18, 2013, 03:31:09 PM by Mr.Macinstache »

gimp

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #4 on: November 18, 2013, 03:31:59 PM »
Don't try to time the market.

There are a lot of very, very smart people writing that the rates will continue to stay low. And there are a lot of very, very smart people predicting the exact opposite. People who spent eight years in school to learn economics and people who spent their entire lives working in the field.

If they can't get it right, how would you?

Instead, focus on the now. Are you in a good position to buy now? Then buy now. Are you not? Then don't.

(It looks like you're currently not in a good position to buy now, to be honest.)

megasaurus

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #5 on: November 18, 2013, 04:17:47 PM »
Thanks for the input so far. To answer a few questions:

SO's brother is willing to let us rent for however long we like. It's definitely not a short-term arrangement, but I also wouldn't say "indefinitely" -- I can't see us wanting to stay here more than a couple years, and I'm sure that at some point he and his partner wouldn't mind having their space to themselves. However we have a great housemate relationship and there is no rush whatsoever to move anytime soon.

My SO and I do plan to get married and have kids. Any home that I would like enough to buy, my SO would like too (we have looked at places together and have the same wants), and if I were to buy I would ensure it's a place that we both like. It would also be big enough (3 bed/2 bath minimum) to accommodate 1-2 small children. I don't mind living in a smaller place for the first kid or even two. If I went to the high end of my price range or even up to 250k, it would be large enough that I wouldn't see it being necessary to move at all after having kids, unless we wanted a nicer place.


gimp: In your opinion, what would it take to be in a good position to buy?

the fixer

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #6 on: November 18, 2013, 04:35:47 PM »
If you're itching to own real estate (as I am as well), consider buying a rental property. You get to capture all the investment gains of real estate while collecting rent to pay your expenses. If you like the place you could one day choose to live in it--essentially paying rent to yourself--or it might bring in enough cash flow to let you buy another house as a primary residence in a few years.

KingCoin

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #7 on: November 18, 2013, 04:58:53 PM »
Rent the basement as long as you're happy doing so. When you're ready to upgrade to a place of your own, rent something cheap ($700-900). When you have a clear picture of what your long term needs are, buy something appropriate.

Buying because you're worried about getting priced out is almost always a bad idea. Worst case scenario, you continue to rent if prices get out of control. Realize that if interest rates rise significantly, that's going to put a lot of downward pressure on prices. In fact, if you're sacking away cash like crazy, rates going through the roof could be ideal as you'll be able to swoop in with your war chest and buy cheap.

olivia

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #8 on: November 18, 2013, 05:05:12 PM »
If you're itching to own real estate (as I am as well), consider buying a rental property. You get to capture all the investment gains of real estate while collecting rent to pay your expenses. If you like the place you could one day choose to live in it--essentially paying rent to yourself--or it might bring in enough cash flow to let you buy another house as a primary residence in a few years.

Ditto this-if it makes sense financially, you could even buy a place you'd like to move into down the road with your SO.  Or if you just want to scratch the real estate itch, you could choose a place that will give you the best return regardless of whether you want to live there or not. 

Plus even if your brother in law decides he wants you all to move out, you could always just rent somewhere else instead of buying if the time isn't right for you and your SO to buy.

Mrs.FamilyFinances

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #9 on: November 18, 2013, 05:46:39 PM »
I would purchase a mid range home that meets your needs now, and in the hypothetical 2 kid future. A 15 year mortgage. Rent it out for a few years until you are ready to move out of the basement.

KingCoin

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #10 on: November 19, 2013, 07:34:51 AM »
I would purchase a mid range home that meets your needs now, and in the hypothetical 2 kid future. A 15 year mortgage. Rent it out for a few years until you are ready to move out of the basement.

While I like this in theory it has its problems.
1) While the future always seems clear, predicting needs multiple years down the road is notoriously difficult. Any number of 100 factors could change that renders the home you purchased a less than ideal choice.
2) Rent of $1400 on a $240,000 aren't very compelling vs other investment options. If rent was closer to $2400, you could make a much stronger case for buying as a short or long term investment.

_JT

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #11 on: November 19, 2013, 10:18:35 AM »
What are you doing with the 50k cash right now?

Mrs.FamilyFinances

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #12 on: November 19, 2013, 10:25:21 AM »
I would purchase a mid range home that meets your needs now, and in the hypothetical 2 kid future. A 15 year mortgage. Rent it out for a few years until you are ready to move out of the basement.

While I like this in theory it has its problems.
1) While the future always seems clear, predicting needs multiple years down the road is notoriously difficult. Any number of 100 factors could change that renders the home you purchased a less than ideal choice.
2) Rent of $1400 on a $240,000 aren't very compelling vs other investment options. If rent was closer to $2400, you could make a much stronger case for buying as a short or long term investment.

He listed his target range of 170k - 250k. My thought was something about 200k, with a decent down payment. I know plans do change over time, but a solid 3 bed 2 bath can almost always fit the bill of a family with 1 or 2 children.  If he was  younger, say 21, I wouldn't have suggested buying now. 27 and seems to have a clear picture of what he wants in the future. It's certainly not without risk though, and anything could change like you said.

megasaurus

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #13 on: November 19, 2013, 11:22:34 AM »
JT: I am not doing anything with the 50k right now. If I wasn't planning on buying a house I would probably put the majority of it into Vanguard index funds.

I do plan on probably 3 children, so a 3 bed 2 bath wouldn't be enough in the very long term. I also need to use one of the bedrooms as an office, unless there's a suitable place elsewhere in the house (unlikely, in the size of houses that I'm looking at).

I don't think I'm comfortable buying a place and renting it out while still taking advantage of living here. That would be like I'm making a profit off of their generosity.

_JT

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Re: I only pay $250 in rent. Would buying a house be a terrible idea?
« Reply #14 on: November 19, 2013, 05:06:11 PM »
I bought a 3/2 just a few months ago, and have two roommates who basically cover my mortgage. I also have a partially finished basement that accounts for ~200sq ft (home gym, workshop, and laundry area), and am currently finishing part of my detached garage into a recording studio (I'm a musician), which will give another 350sq ft of usable space. So if you look for houses with potential bonus space and think outside the box, you could totally find a 3/2 you can grow into.

If I were you, since you have a smoking deal and aren't in a huge rush to buy, I'd just get acquainted with the market. Go see a few more places. If you see one that jumps out as perfect, make a strong offer. If not, just wait. I looked for my house for 18 months, and I'm glad I didn't overpay for any of the places that didn't have all the stuff I was looking for in the area I was looking for.