Struggling with deciding whether to buy a house in DC or keep on renting

[FirePita]

Hi everyone,

We're contemplating buying a house in DC and could use some help analyzing and thinking through this decision.

Background
We currently rent a 1,000 sqft apartment in northwest DC. I work in Dupont Circle (on the Metro red line) and wife works from home. Our kids go just entered elementary school. We chose this neighborhood because it's on the red line for my commute and the best public schools are in the northwest part of DC. We have family in MD so anticipate staying in DC for the next ~10-15 years. After the kids are off to college we may choose to move to Philly where cost of living is a lot more reasonable but still close enough to family in the mid-Atlantic region.

Finances
-Total household income is $350k
-Net worth is $1.2M
-- Cash $250k
-- Taxable $200k
-- Tax-deferred $675k
-- Roth 401k $75k
- Debt $17k in students loans @ 2.125%
- We save about $185k maxing out tax-deferred, 529, mega backdoor and taxable

Current housing situation
- Current rent is $3,500 for a 1,000 sqft 2 bedroom apartment with a garage and a common pool/gym. Our rent increases 3-7% each year.
- We will likely need to rent a slightly bigger 3bd apartment (~1,200-1,500 sqft) in the next 2-3 years as our kids are growing which would be around $4,500-5,000/mo
- Houses that are in our school area and close to the red line start at $1M (tough to find) and $1.2M give us very few options
- We've been looking to get an idea and it seems that we can eventually find a house for $1.2M with a basement that we can rent out for $1,200 (we don't mind having a tenant as both wife and I were landlords before we got married). Definition of a house is detached, semi-detached, townhouse, and row house BUT NOT condo (condo fees go for about $1k/mo here!!)

The way rent continues to increase has made me consider buying but I'm still struggling with sticker shock. I'd love to hear everyone's thoughts from a numbers perspective. Should we keep on renting at $3,500/mo now and $4,500-5,000 and continue to shovel savings into pre- and post-tax accounts OR buy a $1M dollar house!

Thanks for the advice!

[Lucky13]

You might already have looked but search "rent of buy calculator" for a few different ones, I used the New York Times one when I was making this decision a few years ago. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

But it's not only the numbers, it's what you value in your housing situation. For me, I placed a high value on having a predictable mortgage payment, as opposed to unpredictable rent where the landlord can raise it at any time (unless you're in a rent control city). In many cities, rents have historically increased faster than inflation so if you're using 4% rule to compute future expense you'll need to factor that in. As you can guess I'm more in the "buy" camp, although I've also rented and I do think renting is the better choice in some scenarios.

[FirePita]

I played with that calculator but struggled with the appreciation assumption and the investment return assumption. I used 2% for appreciation and 4% for investment and 2% for inflation. That gave me a breakeven point of $1.2M assuming $5,000/mo alternative rent. So based on these assumptions buying a $1.2M house seems like a toss up but a rentable basement would tip the scale to buying. I also have been suffering from rising rent. Building asks for 7-10% increase every year and I negotiate them down to 3-5%. But that’s year on year increases so far.

[Freedomin5]

If you’re planning on staying in the same house for 10-15 years, I would probably buy. That way, you lock in your monthly payments via a mortgage, especially since it doesn’t sound like there’s rent control in your city. And you don’t have the risk of the landlord kicking you out after a few years.

[Villanelle]

$1.2m purchase vs $500k rent?

I'd rent.  (I live in the DMV area and do rent, in fact.  Although I'm in VA, inside the beltway.) 

Buuuuut.... If I could truly find something with a basement rental for that price, that would likely tip the numbers enough to make my strongly consider purchasing.

Also, make sure that you are prepared for a significant increase in costs.  A $1.2m house is likely going to cost you a lot more than $3500 you are paying now or the $5000 you would be paying if you upgrade, especially because homes in that area tend to be older.   Clearly, you have plenty of extra money to be able to absorb the difference but be prepared. 

[FirePita]

Buuuuut.... If I could truly find something with a basement rental for that price, that would likely tip the numbers enough to make my strongly consider purchasing.

Also, make sure that you are prepared for a significant increase in costs.  A $1.2m house is likely going to cost you a lot more than $3500 you are paying now or the $5000 you would be paying if you upgrade, especially because homes in that area tend to be older.   Clearly, you have plenty of extra money to be able to absorb the difference but be prepared.

I'm definitely limiting my search to only properties with a basement rental. So far doesn't seem to be too difficult to find. In terms of upkeep, I'm thinking of setting aside $10-12k per year. Does that seem reasonable?

[frugalecon]

@FirePita  Upkeep will depend a lot on condition, but I allocate around $10k/year in my budget. Live in a 70-yo detached house in NW DC. Don’t forget property taxes, which would run over $9k/year on a house of that value. Plus your homeowner’s insurance.

[FirePita]

Upkeep will depend a lot on condition, but I allocate around $10k/year in my budget. Live in a 70-yo detached house in NW DC. Don’t forget property taxes, which would run over $9k/year on a house of that value. Plus your homeowner’s insurance.

That's helpful to keep in mind. What's a reasonable range for homeowner's insurance cost? I've assumed $6k/yr

[frugalecon]

That’s way more than we pay! We pay about $1000 for homeowner’s insurance. Also have an umbrella policy on top.

[FirePita]

That’s way more than we pay! We pay about $1000. Also have an umbrella policy.

I honestly have no idea! It was just a wild guess. I should probably get a quote from my insurance agent where I have my auto/umbrella.

[shinn497]

This is more of a post of Case studies as it doesn't involve investment.

If I were you. I'd live on a tight budget. Save an extra 150k for two years. Drop 600k on the house, with a 15 year mortgage. Now your housing payment is 1/4 of your take home pay and you are in a house in dc.

Funny. I live in dc and my numbers are so different from yours but my income isn't nearly as high and i am single. eh well.

[aspiringnomad]

I've lived in DC for the last 16 years and am very familiar with the housing market and the general area you live in. I owned a house in Adams Morgan until last year and still own a rental property in NE. I now rent myself as I get ready to do some long-term travel.

I love renting mainly because it's carefree, but this was not the cheaper option. Given your timeline, and growing family, I think it will also be much cheaper for you to purchase in the long run. However, you have to be committed to staying awhile as real estate transaction costs are no joke (even when selling with Redfin). One good thing about the rest of the city becoming more desirable in recent years is that prices in upper NW have not appreciated at the same rate as those parts, so while still mindboggingly expensive compared to the most of the country, west of Rock Creek has slowly become a pretty good value relative to the rest of DC - especially when you consider the better schools and lower crime rate in that area. And you can still bike just about everywhere.

[MustacheAndaHalf]

I played with that calculator but struggled with the appreciation assumption and the investment return assumption. I used 2% for appreciation and 4% for investment and 2% for inflation. That gave me a breakeven point of $1.2M assuming $5,000/mo alternative rent. So based on these assumptions buying a $1.2M house seems like a toss up but a rentable basement would tip the scale to buying. I also have been suffering from rising rent. Building asks for 7-10% increase every year and I negotiate them down to 3-5%. But that’s year on year increases so far.

Your estimate of 2% increase in appreciation might be too low.  When I searched for rent increases in DC, the first result said the increases averaged 3.7% per year:
https://www.bizjournals.com/washington/news/2019/12/18/d-c-areas-rent-increases-among-the-highest-in-past.html

They also gave a +55% total increase for 10 years, which I calculate at 4% per year.  Because rents are increasing more quickly in DC, I'm guessing after you use 3.7% or 4% in the rent-or-buy calculation, it will shift towards buying.

[chasesfish]

I guess I don't understand the apartment to house comparison.

What would it cost to rent a *house* that is both the size and in the location you want to be?  Thats the comparison you should be looking at.

My rule of thumb is if the monthly rent is 0.8% or below the value of the house, renting makes more sense.  If monthly rent is 0.81% or greater than the value of the house, then you should buy.   Its like the 1% rule, but its a little better for an owner occupied house at today's rates.

The only real exception to this is if you know its your final house and you're 100% certain you'll be there for fifteen or more years.  Then its not a financial decision, but a decision about the security and certainty of control.

Expect maintenance cost to be 2% of the value of the home annually for anything older than 20 years.

[FirePita]

It is the comparison I’m looking at. In a couple of years we will want a third bedroom. Whether that’s an apartment or a house. Reality is there is almost no supply of 3bd apartments in NW DC so we would likely end up renting a 3bd house for $5-7k/mo.

0.8% is impossible to find in NW DC. Rent would be at most $8,000 for. $1.2M house. This isn’t necessarily our final house but will be our house until kids go to college which is 10-15 years.

On maintenance, most houses here are built in the 20s. 2% on a $1M home is $20k/yr. Does this amount sound about right for an old 3bd detached?

[Villanelle]

It is the comparison I’m looking at. In a couple of years we will want a third bedroom. Whether that’s an apartment or a house. Reality is there is almost no supply of 3bd apartments in NW DC so we would likely end up renting a 3bd house for $5-7k/mo.

0.8% is impossible to find in NW DC. Rent would be at most $8,000 for. $1.2M house. This isn’t necessarily our final house but will be our house until kids go to college which is 10-15 years.

On maintenance, most houses here are built in the 20s. 2% on a $1M home is $20k/yr. Does this amount sound about right for an old 3bd detached?

It seems perhaps slightly high, but not obscenely so.  This will also depend on things like whether the place you buy has a 2 year old roof or a 25 year old roof, whether HVAC, water heater, and other major hardware has been updated, state of the plumbing, etc.  My home (rental townhouse) was built in the late 1800s and the landlord is ALL about deferred maintenance.  If someone bought this house and wanted to actually take care of it in a way that would have it not crumbling to pieces in the next 10-20 years, they'd probably have to spend tens of thousands in the first couple years, simply because so much hasn't been done.  Replacing rotting wood outside, then paint.  Windows that, while they don't seem especially old, don't close properly or stay closed at all.  Flooring (not a cosmetic issue; it's in shit shape).  Things like that.  This is on the far end of what someone could expect, but they are the kinds of things that are going to cost you money when you buy, unless it has had a major overhaul (and even then, you don't always know if the pipes inside those walls are still in good shape, or something like that).

So it $20k reasonable?  Depends on the property. 

[ChpBstrd]

With a NW of $1.2M and savings of $185k per year, it would be hard for me not to retire to a LCOL area in about 2-3 years. But that would be my priority, not necessarily yours. I’m guessing one doesn’t earn $350k a year with the mentality that work is a means to an end. :)

But also ask yourself about job security. If you somehow lost this gig, how would your housing requirements be different? Might you be selling if that happened?

[chasesfish]

It is the comparison I’m looking at. In a couple of years we will want a third bedroom. Whether that’s an apartment or a house. Reality is there is almost no supply of 3bd apartments in NW DC so we would likely end up renting a 3bd house for $5-7k/mo.

0.8% is impossible to find in NW DC. Rent would be at most $8,000 for. $1.2M house. This isn’t necessarily our final house but will be our house until kids go to college which is 10-15 years.

On maintenance, most houses here are built in the 20s. 2% on a $1M home is $20k/yr. Does this amount sound about right for an old 3bd detached?

So you're saying you can rent a $1.2mil house for $6,000 or so a month?  To me that's a no brainer.  Keep your money invested and rent.  A mortgage is the floor of your housing cost as an owner, whereas rent is the ceiling.   

On the 20k, it probably depends on the square footage.  It may be a bit less because the houses are smaller, but in my recollection most everything inside the beltway is 1950s or earlier.

[BlueHouse]

I am curious which studies say the schools are better in NW DC.  I think it was true 5-10 years ago, but not so sure now.   The schools are definitely whiter in NW, but with charter and magnet schools, I don't think that will be the case by the time your kids reach middle school. 

[Ricochet]

From personal experience, I'd recommend buying. I've seen my DC house value rise 17% in 5 years, if you take the online estimates into account.
The reality is that the new housing in DC is almost all condo and apartment living, which means that if you own a house they will only become more premium and expensive as time goes on. Where are the newly weds looking to move FROM the condo life, but the overprice and every-increasingly slim pickings of houses on the market? Best o' luck!

[jeroly]

I am curious which studies say the schools are better in NW DC.  I think it was true 5-10 years ago, but not so sure now.   The schools are definitely whiter in NW, but with charter and magnet schools, I don't think that will be the case by the time your kids reach middle school.

Some of the elementary schools are definitely better (e.g. Key School) because the DCPS allows parents to throw $$$ at the school on top of the District’s funding.

[Villanelle]

It is the comparison I’m looking at. In a couple of years we will want a third bedroom. Whether that’s an apartment or a house. Reality is there is almost no supply of 3bd apartments in NW DC so we would likely end up renting a 3bd house for $5-7k/mo.

0.8% is impossible to find in NW DC. Rent would be at most $8,000 for. $1.2M house. This isn’t necessarily our final house but will be our house until kids go to college which is 10-15 years.

On maintenance, most houses here are built in the 20s. 2% on a $1M home is $20k/yr. Does this amount sound about right for an old 3bd detached?

So you're saying you can rent a $1.2mil house for $6,000 or so a month?  To me that's a no brainer.  Keep your money invested and rent.  A mortgage is the floor of your housing cost as an owner, whereas rent is the ceiling.   

On the 20k, it probably depends on the square footage.  It may be a bit less because the houses are smaller, but in my recollection most everything inside the beltway is 1950s or earlier.

I'm about 15 minutes outside of DC, but inside the beltway, and where I am, it's even better (for a renter) than that.  A $1.2m house probably rents for about $4500 where I am.  I can't comprehend by anyone would buy here.