rent vs. buy (now). Is my train of thought moving forward or backward?

[Late_Bloomer]

I've been an advocate for buying for a long time but recently have changed my direction and wanted to post to get some insight regarding some calculations I've made.

Some facts about my situation:
Time to FIRE: 15 years. Will be age 57.
I don't plan on remaining at current location, whether I buy or rent, once I FIRE.
medium home price range: 100k to 125k
15 year fixed rate @ 2.9%: to coincide with FIRE date. I could do 30 year but would go with 15 yr because it's more emotionally stable (for us).
for either situation we will continue to max TSP and 401k annually.

Here are the calculations I've run for both scenarios. This is provided I stay in my current rental for the next 15 years. If I did move to another rental, it would be less expensive, ranging between 800.00 to 1,000.00 per month. This would make my rent scenario even more attractive, but for arguments sake, I'm basing the information on staying put. Current rent is 1,200.00 month. It is an apt 7 minutes from work with garage, community center, pool, nice location, and all outside services (grocery, stores,ect.) within minutes walk/drive.

to buy based on 125k purchase price for 15 yr period (using whole numbers):
20% down...25k
closing and commission...8k
Loan interest...29k
home insurance...18k
1% of home purchase price for maintenance...36k
property tax...45k

Approximately 261k to purchase and live in home for 15 years. I'm not including basic utilities because they are just about the same in either situation. This would leave me in what you call a "house poor" situation because I would have to use my emergency fund for down payment and closing/commission, (33k). This would put me in a position where I would have to start amassing emergency fund from scratch, but I'd have a house!

to rent based on staying in current rental @ 1,200.00 month:
approximately 216k for renting, give or take rental increases over the years.

The added benefit to renting is that it gives me the option to be 100% debt free and save 400 month in an IRA, which would be our new emergency fund, as well as serve as the fund used to purchase a home at time of FIRE. The only debt we have is a 15k vehicle note. If we purchase a home now, we would have to keep paying 400 a month for the next 3 yrs on the vehicle. If we rent, can use half of the the current emergency fund to wipe it out and put the other half in the IRA. The 400/month originally used for the vehicle could then be put in the IRA as well. The calculations I ran for doing this at 4% for the next 15 years would give around 193k. This includes 52k that is sitting in the IRA currently.

Before this, my thinking has been, buy a home and pay 900.00 a month or rent and pay 1,200.00 a month. Woa, buying is way cheaper, and we will have a paid off house! but of course, I'm not adding in the opportunity costs of each scenario thinking this way. Once I ran the numbers, the rent situation seems much more favorable for the following reasons:

100% debt free
no large maintenance costs that could potentially be a disaster with starting out at little to no emergency/maintenance fund to go with the home purchase.
freedom of choice and movement that comes with renting. As I mentioned in the beginning, we do not plan on retiring in our current location. we know we will move move at the 15 yr mark, providing the markets don't let us down until then.
ability to build future home purchase stache with no emotional stress.

The rent option seems so damn good that I feel stupid even posting about this. Am i making grossly inaccurate calculations?











 

[rupanama]

I recommend working out your calculations on this tool, to test your ideas:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
Judging only from your description, it sounds like you should rent, unless there's a strongly compelling intangible value that you'd get from owning a home.

[Late_Bloomer]

Using that calculator, it states if I rent for 1,400.00 or less, renting is better. However it also says for a Similar place, which I interpret as sq. footage, number of rooms, ect. Our rental is 900 sq. ft, one bedroom with garage. The home would be 1,200 to 1,500 sq. ft, 3 bedroom with garage and yard space. We have grown to like the smaller space so I guess that comparison is moot to us.

[Mother Fussbudget]

Do you know where you want to live post-FIRE?  If you do, you could buy a house in THAT location, and rent-out-the-house between now and FIRE.  You may need a property-manager/maintenance-person for the rental, but if the rent received from the house covers the mortgage payment & insurance/taxes, you could have the best-of-both worlds.  Rent where you are today (whether or not you downsize to a cheaper rental) AND purchase a house, rent it out, have regular passive income, and take advantage of 15 years of property appreciation/depreciation in the house.

[cchrissyy]

your home insurance estimate sounds far too high. Much above what I'll pay for 15 years to cover a house worth many times more, on a hillside fire danger zone!


and I don't think it is fair to count the down payment as a cost of buying. The money is still yours, only tied up for a while. The fair thing to count would be the interest that 25k could have been earning for you over 15 years.  But if you do that, you should add to the cost/benefits of ownership some figure for the home's appreciation.

bottom line, use the NYT calculator tool! : )

[Goldielocks]

If you rent, will you have the discipline to put aside the savings?   e.g., property taxes each year can easily be spent on vacations instead without realizing it.

If you buy, will you resist the temptation for "improvements", and above minimum maintenance?  36k over 15 years is really not that much, a roof, a deck replacement, maybe appliances.   What about flooring or closet shelving and painting? 

[undercover]

But, remember...you'd own part of that $261k. You wouldn't own any of the $216k. The total cost of renting will also eventually surpass the cost of owning even if you don't consider equity.

The rent v buy calculators assume that you'll sell in the future and uses the value of the home at time of sale to determine which option is cheaper after the house is sold.

If the home keeps up with inflation (assume 3%)...it would be worth $195k in 15 years, and sell for $184k after commission...bringing total cost down to $261k - $184k = $77k.

Even from a cash flow perspective, you're going to be all in cheaper than $1,200/mo, while considering the opportunity cost of $83/mo (not investing $25k). Plus, you'll have a larger space. You could even rent a room out to make the equation even more of a no brainer.