Author Topic: Renting Long Term - should I plan to buy eventually?  (Read 1698 times)

BreakingtheCycle

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Renting Long Term - should I plan to buy eventually?
« on: November 05, 2014, 11:19:59 AM »
I've read some discussion of whether to rent or buy a home, and I've had the experience of both.  We bought a small fixer-upper in 2006 (housing market peak), for $160K with 20% down.  We invested $20K in updates, but the house was a money pit and still needed a new roof and a major plumbing repair when we ended up getting rid of it (Deed in Lieu of Foreclosure...long story).  The bank sold it for $89K in a neighborhood that had 5 other foreclosures on our street.

So we lost our $50K+ that we put into the home when we moved out of state and were unable to rent it out, and have to start fresh.  For us it was worth the loss to live in this new city where the culture aligns with our values, DH can walk/bike/bus to work, he makes 30% more money, our kids can go to the local charter school (vs. the shitty public school in our old area), we're (happily) further from dysfunctional family members, and so on.

We're paying $1550 to rent a house now (1400 square feet near downtown, 3 beds, 1.5 baths, nice yard where I'm allowed to have a veggie garden, tap the maple tree for syrup, and harvest cherries from the cherry tree!).  We are in no position to buy a home anytime soon.  The home we're in is worth $200K according to zillow, but most homes in the area are actually selling for $250K+.

Based on what I've read, we should intend to continue renting as DH's income of $90K isn't enough to COMFORTABLY afford a $250K+ home, especially if he intends to retire early at some point.

So we're emotionally prepared to rent long term, but worried about possible rent increases or for some reason having to find a new place to rent (we would love to live in this house another 5 or 10 years).

My question is - what about the longer term?  Would it make sense to always rent until we get old and die (or go into a retirement community or nursing home or whatever happens to us), or should we be planning to SOMEDAY actually buy something, even if the goal is to buy it outright?

Buying makes sense in that, at some point if the loan is paid off, we could enjoy NO monthly payment (no mortgage or rent), whereas if we intend to always rent then we will always have to pay a significant monthly amount (even for renting a smaller place in a cheaper area).

So to make a very long story short, I guess my question is, if you are planning to rent long term, should you also be planning to buy at some point in your life?
« Last Edit: November 05, 2014, 11:23:29 AM by BreakingtheCycle »

Terrestrial

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Re: Renting Long Term - should I plan to buy eventually?
« Reply #1 on: November 06, 2014, 11:51:19 AM »
I don't think there is a way to tell if it's 'always' better to plan on buying or to keep renting, it's situation/local market dependent.  You need to run an analysis to figure out what's more advantageous for you, just because you pay off a house at some point but would need to keep paying rent doesn't mean that it's a better deal to buy, if your rent is enough of a discount over your ownership carrying costs and you can invest the difference.

Here's how I would break down your situation in a very quick back of envelope way, but this is the gist of the type of analysis you need to do to figure out if you should buy or not, tailored for your specific situation and assumptions.  I was much more detailed when I did my own rent/buy breakdown but it roughly works like this:

Buy:  If you want to buy a 250k house and save the 20% down (50k) your carrying cost with taxes/insurance/1%  annual maintenance set aside with a mortgage of 200k @ 4% is about 1375/month (on a side note I agree this is maybe a touch high for my taste on a 90k income, but not horribly so...it's doable and plenty of people spend more...the fact that your carrying cost is lower than renting is a positive).  Lets assume for simplicity your total carrying cost goes up at 1% annually (prop taxes and maintenance will go up over time, mortgage will stay the same), and that the value of your house goes up at 3% a year.  After 30 years you will have no mortgage, a house worth about 600k, and will have spent about 575k carrying the house over that time.  No mortgage from that point out (though still prop tax/maintenance).  The 600k house adds about 18k to your paper net worth per year at that point, and if you save the difference in carrying cost over the rent (900k) you would have ~300k+ in the bank, which would probably about cover the taxes/maintenance on the house with a standard 4% drawdown.  So you probably end up with about 900k in assets and net neutral monthly housing cost from drawing on the 300k in this scenario.

Rent:  1550 and goes up at 3% (inflation)....over the course of 30 years you will have spent about 900k in rent payments.  But you also would have the 50k that you could invest because you didn't need a down payment, lets say it makes 8% over that 30 years.  After the same 30 year period you would have about 500k in the bank from that original 50k.  500k will provide you with about 20k a year in perpetual income in which to keep paying rent.  Unfortunately rent at that point would have ballooned to about 3800/mo just based on inflation, or around 45k a year.  Your 500k will spin off 20k of income to cover it but you'll still be spending 25k a year on rent and only have 500k in assets.

So in this situation I would probably buy if it was me...but again it's situation dependent and it's just as easy to find some markets where the numbers work out to pro-renting.  Hope this helps.

Also keep in mind that there are many intangible reasons people may/may not want to buy a house.  Some people like to be able to modify them to their taste (pro-buying), some people hate dealing with repairs and like calling a landlord (pro-renting), if you really like your neighborhood/house you can never be kicked/priced out if you buy as opposed to rent (pro-buying), owning can hamper your flexibility to take new jobs in different areas or travel and the house can be hard to unload or decrease in value if the town/neighborhood declines (pro-renting).  Huge list of intangibles that may or may not outweight the pure monetary analysis.

« Last Edit: November 06, 2014, 12:04:34 PM by Terrestrial »