Author Topic: "You'll Lose Money!" - Is my math wrong? (3-5 year house)  (Read 13819 times)

PolymathPaul

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"You'll Lose Money!" - Is my math wrong? (3-5 year house)
« on: May 12, 2013, 09:21:56 AM »
Currently renting a house 45-55 minutes from my job. It's convenient for my partner, who only drives 10-15 minutes to work.

We pay $1050 and about $100 a month for all-electric utilities in a house worth $130,000. Boring neighborhood. Can't walk to a bar, grocery, or gas station.

I've been eyeing a small town that would put me at 25-35 minute commute, and her at 20-30 minute commute, and the average home price in that town ranges between $100,000 and $150,000. I'm thinking our next move will involve a purchase.

Now, we'd ultimately like to move south in a few years, once I've got some experience behind me. Lets give it 3-5 years.

Everyone is telling me "if you only keep a house for 3-5 years your garunteed to lose money!"

Lets say we buy a $100,000 house, put %20 down, and get our mortgage down to $500-600 a month. We'll obviously be paying PMI , taxes, insurance and closing costs that we won't get back. So that's what, $5000-$7500 in the hole?

Renting for that same 3-5 years at $1000/month will could cost us $60,000!

2016 NOTE: This first post was made back when I lived on the opposite side of the country, worked a job very far away from work, and had no savings. A few years later, I moved across the country for a better job, committed to living within 5 miles of my work, and saved $50k in a year.

« Last Edit: January 06, 2017, 12:03:22 AM by PolymathPaul »

matchewed

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #1 on: May 12, 2013, 09:32:00 AM »
You just need to run some more solid numbers. And don't forget to include the costs of transportation in the equation.

Run your scenario through some mortgage calculators to get a better idea of the costs. Then compare it to the 60k.

*Edit*

Don't forget the costs of maintenance of the property.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0
« Last Edit: May 12, 2013, 09:36:49 AM by matchewed »

GreenGuava

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #2 on: May 12, 2013, 09:42:32 AM »
And also don't forget transaction expenses (closing costs, etc).

secondcor521

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #3 on: May 12, 2013, 10:07:42 AM »
5 years of rent @ $1K is $60K.

If you put down 20%, you won't pay PMI.

Have no idea on taxes and insurance -- ask a local bank for an estimate.  Actually, for taxes you can call the county that the property is located in and find out what the taxes are now, which should be about what you'll pay unless they reassess based on the sales price.  My wild SWAG would be 2% per year, so 10% over five years, so $10,000.

Realtor fees, if you go the traditional route, will cost you 6% on the back end, so say $6,000.

Closing costs you'll pay both ways for different things, maybe 2% both directions, so $4,000.

There'll be moving costs, which depending on how much stuff you have and how professionally you go, could be $1,000.

If it's a bigger place or if you're into stuff looking nice, you may have to include costs of buying more furniture or decorations.  Maybe $1,000?

Ditto landscaping.  Maybe another $1K.

Maintenance rule of thumb is 1% per year, so that's another $5,000.

Depending on exact location, it sounds like transportation costs to your jobs are probably a wash.

Biggest thing to consider in this kind of situation is that the house may go down in value during the time that you're there.  If that's the case, then you may end up underwater and need to bring additional money to the table when you sell (ouch), or keep it as a rental when you move south.  Being a long distance landlord may or may not be your idea of a fun time.  If it drops $10K in value, there's another $10K.

So my SWAG is $60K loss renting, and up to a $38K loss on the house.  Some of the difference there is probably your current landlord's profit.  Some is probably a difference between the two markets of where you live now versus your prospective town.  But your rent and price numbers are similar enough to where I live to be believable.  And I own in my town and consider renting to be the more expensive option overall here.

Johnny Aloha

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #4 on: May 13, 2013, 03:39:00 PM »
Check out the NYT buy vs rent calculator.  Make sure you verify the advanced settings (for closing costs, appreciation, etc) so you analyze the actual situation.  I remember the default settings were way too high for my market.

tryan

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #5 on: May 15, 2013, 07:35:46 AM »
With only 3-5 years you're making a play on appreciation ... prices go go UP you win .... down you lose.  That move will dwarf any rent vs own expenses.

It's anyones guess ... mine says we're close to a bottom so you should be ok.

kt

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #6 on: May 15, 2013, 08:07:13 AM »
I've asked and wondered this before. When rent is higher than mortgages it is hard to see the sense and I must say to me the math still doesn't add up.

To me secondcor521's math says you stand to gain $22k by buying, which means if you buy a $100k house it would have to depreciate by 22% in 5 years for you to lose.

A lot of financial decisions are about grey areas and I will play be the held wisdom that you should only buy if you're looking at a longer stay but it doesn't seem highly likely to me that a house could fall 22% in value in 5 years (in the areas I'm looking at the prices are already pretty low).

I'm not validating your thoughts so much as saying I've thought the same and struggled with it.

mpbaker22

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #7 on: May 15, 2013, 09:08:58 AM »
Perhaps you can find lower rent somewhere?  I was in a similar situation about 6-8 months ago until I realized I could find a place with half the rent payment.  That pretty much killed any desire to buy other than the emotional.
... Still looking for a multi-family though, but biding my time with it.

MrsPete

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #8 on: May 16, 2013, 07:41:52 AM »
This kind of math is difficult because it involves multiple unknowns. 

One thing I'd add to what's already been said:  Just how firm are your "gonna move South in a few years" plans?  I know that when we bought our first house we intended to stay five years.  We lived in that house eleven years.  Life has a way of being unpredictable that way.  I think the "how long will you really stay" question is tremendously important.

Mola

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #9 on: May 18, 2013, 01:05:19 AM »
That rule of thumb is simply that on average you wont gain in appreciation what you paid in transaction costs. Like any rule of thumb, there are so many assumptions baked into it's almost meaningless. Its also a statement made in isolation of other opportunities. Your intuition is right, even if the rule turns out correct in your case, the question will you lose MORE money renting.

Property and loans are cheap right now so that rule of thumb is less applicable then the day it was invented.

meadow lark

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #10 on: May 19, 2013, 12:33:36 PM »
Secondcor, I didn't see where you added in the cost of interest.  If you pay $500 a month for the first 3-5 yrs of your mortgage, you're paying $350-400 in interest a month, and $100 - $150 goes to principal.

suntailedshadow

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #11 on: May 19, 2013, 02:01:13 PM »
Another Factor that I haven't seen mentioned yet is the Down Payment interest lost. Say the House is 100k, if you were too keep renting and invested that 20k down payment at 6% for 5 years it would be roughly 27k. So there is another 7k lost if you put it into the house. As was mentioned, there are tons and tons of numbers to run for these types of decisions.

The Dutchman

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #12 on: May 20, 2013, 08:30:47 AM »
At that short time frame it is a risk.  The main thing you will be losing is all the Fees (Realtor and Bank).  If you can take your time and find a great deal or a fixer upper that would be your best bet for such a short time frame. 

Also, my favorite calculator is: http://www.mlcalc.com/

foobar

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #13 on: May 20, 2013, 10:30:29 AM »
Lets run some math on buying a house
 100k house with 20k down
7 year arm with a payment of 320 and ~4k in closing costs.  Obviously if you have sucky credit this number will go up.

Assume taxes of ~4k/yr (probably high)

So after 5 years you will have paid something like
~20k in mortgage payments-~9k for principal payments
~4k in closing
~6k to sell the house
~20K in taxes
~12k in opportunity costs of investing that 20k (assuming 10%)
~5k in maintenance
~3k in property insurance

for a total of 61k for owning versus 60k. Now a bunch of those are guesses (taxes is the big one. 4k is a very high number but it happens. Something like 1-2k is more likely) and your rent is likely to go up but you get the point that over the short term it is pretty close. You are not talking about a 60k difference. It will probably be in the 10-20k range (either way. Discovering that you need to replace the roof and HVAC in 3 years will kill any gains) either way.

Personally i would buy if you have never done it before just for the experience (and I don't mean that in a good or bad way). That knowledge will help you when you move to your next spot.

Currently renting a house 45-55 minutes from my job. It's convenient for my partner, who only drives 10-15 minutes to work.

We pay $1050 and about $100 a month for all-electric utilities in a house worth $130,000. Boring neighborhood. Can't walk to a bar, grocery, or gas station.

I've been eyeing a small town that would put me at 25-35 minute commute, and her at 20-30 minute commute, and the average home price in that town ranges between $100,000 and $150,000. I'm thinking our next move will involve a purchase.

Now, we'd ultimately like to move south in a few years, once I've got some experience behind me. Lets give it 3-5 years.

Everyone is telling me "if you only keep a house for 3-5 years your garunteed to lose money!"

Lets say we buy a $100,000 house, put %20 down, and get our mortgage down to $500-600 a month. We'll obviously be paying PMI , taxes, insurance and closing costs that we won't get back. So that's what, $5000-$7500 in the hole?

Renting for that same 3-5 years at $1000/month will could cost us $60,000!

kt

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #14 on: May 23, 2013, 05:36:04 AM »
i know it doesn't alter the sums of buying/selling but does it change anything if you've paid the house off by the end of the 5 years?
for example, it seems this would give you more freedom to wait for a better price if the market has dropped or to let it out.

SwordGuy

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #15 on: May 23, 2013, 08:57:00 AM »
I've asked and wondered this before. When rent is higher than mortgages it is hard to see the sense and I must say to me the math still doesn't add up.

To me secondcor521's math says you stand to gain $22k by buying, which means if you buy a $100k house it would have to depreciate by 22% in 5 years for you to lose.

He still has to make the mortgage payments, those weren't included in the numbers above.

twinge

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #16 on: May 23, 2013, 09:58:13 AM »
Quote
We pay $1050 and about $100 a month for all-electric utilities in a house worth $130,000. Boring neighborhood. Can't walk to a bar, grocery, or gas station.

I've been eyeing a small town that would put me at 25-35 minute commute, and her at 20-30 minute commute, and the average home price in that town ranges between $100,000 and $150,000. I'm thinking our next move will involve a purchase.

The real comparison though should be with what it would cost you to rent in the new town. 

foobar

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #17 on: May 24, 2013, 06:37:45 AM »
Not really.  You are still losing money every month the house sits on the market. Wether that lost money is in interest payments or opportunity cost doesn't matter.  Now having 100k laying round means you will not have a cash crunch when you want to move.

i know it doesn't alter the sums of buying/selling but does it change anything if you've paid the house off by the end of the 5 years?
for example, it seems this would give you more freedom to wait for a better price if the market has dropped or to let it out.

kt

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #18 on: May 26, 2013, 03:07:21 PM »
thanks for the help, i was always going to listen to conventional wisdom but have now done some sobering sums and am properly persuaded.

Ty Webb

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #19 on: June 23, 2013, 11:19:25 PM »
Twice in the last 8 years I've bought a house in Toronto and sold it two years later. The first one I sold for $100,000 more than I bought it for and the second one was $240,000 more than I bought if for so I would say no you won't lose money in a city where people want to live with lots of employment opportunities.

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #20 on: June 23, 2013, 11:36:09 PM »
Twice in the last 8 years I've bought a house in Toronto and sold it two years later. The first one I sold for $100,000 more than I bought it for and the second one was $240,000 more than I bought if for so I would say no you won't lose money in a city where people want to live with lots of employment opportunities.

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kt

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #21 on: June 24, 2013, 01:39:45 AM »
yeh, i suspect losing money on housing in london is rare too but unfortunately im not looking at buying there!

Gerard

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #22 on: June 28, 2013, 04:55:23 PM »
Most of us here are taking your "three to five years" and running the numbers on five, but it gets uglier if you run it on three years, because so many of your buying/selling expenses are one-time, not monthly. I would also add at least a few thou to fix the inevitable problems that crop up when you buy... things that only become apparent during rainy season or cold weather or whatever.

PolymathPaul

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #23 on: January 06, 2017, 12:01:14 AM »
So as a I follow up, we decided to buy. The market in this area (my new town, on the opposite side of the country from my original post) is incredibly hot, and we were having no luck finding any cheaper rentals that satisfied what we wanted in a house. Our current rental will be going up to $1550 next year. We pay towards all utilities. I'm not entirely sure but I think that $1550 didn't include the $100 garage I was renting. I found some houses around town renting for between $1650-$1800.

Three main problems were:

 1) desirable and non-desirable sides of town, but similar prices. Stuff on the less desirable side of town just sat longer. We decided to stay on the desirable side of town, which is also only 7 minutes from my work as opposed to 20 or 25. It's also within riding distance of my work.

2) All of the cheap homes needed more than just paint. When I say "cheap", I really mean, overpriced. They were either in terrible neighborhoods, had lots that limited expansion of small houses, or were condos with additional monthly fees. We couldn't find anything that didn't have a glaring issue (45 driveway anyone?), bad neighbors (trailer across the street) or wasn't a combination of both issues (overpriced, outdated house on a funky lot with weird neighbors).

3) Condo and HOA fees in condos or newer subdivisions. We went back and forth a bunch of times about buying a cheaper condo, but HOA fees are sunk costs, and spending $260k for a 3bed2bath condo with a $150 quarterly fee just didn't seem worth it. There are some nice neighborhoods with new home selling for $325k, but they also have $150 quarterly fees and no backyards, and they aren't any closer to work.

We ended up spending a solid $300k on a house, but that was after putting offers on 4 different houses at the same price, all of which needed work (outdated), all built prior to 1995, all of which ended up selling for more than asking price. Another, cheaper house was offered to us, but it needed so much work that we didn't think we'd ever get to live in it as it's final "desirable" form. For $240k it was essentially a tear down. Nice lot though.

The home we did find however, is close to my work, built in 2007, very unique with great curb appeal, and being a custom built home has lots of fancy features. We also got away with paying pretty much exactly $300k, as a seller's credit covered most our additional costs. The only issues are some grading work that needs to be done on the side of the house and I need to expand the parking, and I got quotes for both for under $4,000. It needs nothing in the interior.

So after 3 years I'm aiming to have paid something like
~33k towards interest-~11k towards principal
~1.5k in closing
~18k to sell the house (worst case scenario)
~6K in taxes
~4k in opportunity costs of investing that 60k (assuming 2%) (I'm a bad investor)
~5k in maintenance (which is more like $5k towards things that will hopefully add value)
~1.5k in property insurance

All this being said, I completely expect to lose money. I highly doubt the house will appreciate much more, and if it does it'll only be because I spend money on expanding the parking which would improve its already good curb appeal, but as a whole I don't think it'll appreciate. I hope when we do sell that I can negotiate a lower commission by using a family realtor to generate MLS listing and paperwork. So even if we sell it for $305k with $5k in concession, and manage to only pay 3% in commission, we'll still be out $10k, plus taxes, plus interest, plus maintenance...putting us just about breaking even on renting (36 months at $1550 is $55,800).

If we had more (cheaper) rental options, we wouldn't have bought. If we had more housing options (and being within 5 miles of work wasn't as high of a priority to me), we would've bought cheaper, saving us more in interest and commission fees later on.

If we come out of the other side with $1 more than what we put in, I'll be extremely happy. If not, I'll chalk it up to being a learning experience.
« Last Edit: January 06, 2017, 12:04:48 AM by PolymathPaul »

mikefixac

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #24 on: January 06, 2017, 12:28:15 AM »
If you overthink it, don't bother. You'll end up doing nothing.

Even if you're to lose money, who cares. The upside potential is so much higher, that even if you lose money, you'll be richer and a lot more knowledgeable with the experience.

clarkfan1979

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Re: "You'll Lose Money!" - Is my math wrong? (3-5 year house)
« Reply #25 on: January 07, 2017, 03:05:43 PM »
You will pay approximately 3% of the purchase price in closing costs and fees to acquire the property. You will pay another 7% in closing costs and fees when you sell. As a result, the house will need to appreciate by at least 10% in order to sell it for what you paid for it.

This is typically why most people claim that you need to be in a house for at least 5 years for it to make sense. It's just a general rule.