Early retirement: home purchase vs rent

[morninglightmountain]

Hey all,

If the goal is to retire in 7 years, does it make sense intuitively to switch from renting to buying a townhouse? This is a risky proposition, in that there is no guarantee of appreciation and we could be in the middle of a recession in 5 years. My capital would be tied up in a pretty iliquid asset. However, the same concern could be said of the stock market.  2024 could be like 2009 and wipe out a lot of my NW.

Anyways, my situation is that I'm 28, in a live-in relationship and have great career prospects, but I live in the expensive DC metro area. My current financial situation (assuming I continue to rent with modest increases) indicates that I could retire in ~7 years.

I could buy a townhome for around $400-$450K, and with my SO contributing to the mortgage, my monthly housing expenses (including maintence reserve, utilities, etc.) would be around $1,400.  My current rent is $930.  Has anyone else made this determination for themselves?  I'm tired of apartment life but don't want push back my retirement timeline because of emotional reasons. 

General comments/experiences/advice is appreciated.  I'm not asking anyone to do my analysis for me - I'm a bit of an Excel jockey and will do an in-depth financial analysis.  I think the fundamental question is which asset is better for a 7 year timeline: stocks/bonds, real estate, or cash.

[englishteacheralex]

We went with buying a condo, figuring that once we pay it off, it's a pretty sweet hedge against inflation. We love the idea of a paid for home. Read every argument about renting vs. buying we could find. In the end, it seems like more conservative people (us) like to buy, everything else being equal. It represents a lot of good stuff: hedge against inflation, further diversification of assets, forced savings...

Totally aware of all the drawbacks of owning property, but we figured since we bought a sensible home relative to our income and are not super aspirational people who would want to upgrade before the place was paid off--and we love our jobs and it's not likely we'll move anytime soon--it made sense in our situation. There are a lot of variables, not least of which being personality/risk aversion.

[tawyer]

I went through this decision making process about a year ago. I found the NYT had made an interactive tool to address this very question:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

I then found another interactive tool that produced slightly different visualizations:
http://www.realtor.com/mortgage/tools/rent-or-buy-calculator/

Quick back of the envelope: plugging in the basic numbers you give ($450K mortgage, 2*$930 rent for you and SO) indicates that buying becomes cheaper after eight years. My interpretation of this result is that over the seven year time period you state it's a wash between the two.

My circumstances showed no clear winner, so I stuck with renting.

The second part of your question is to choose between stocks/bonds and cash. According to the WSJ, risk aversion is the biggest mistake people in their 20s make:
The Biggest Money Mistakes We Make—Decade by Decade
http://www.wsj.com/articles/the-biggest-money-mistakes-we-makedecade-by-decade-1477275181
(Google the title if you get the paywall)

I think it is consistent with the 4% rule on this website to suggest that stocks/bonds is a better asset class for most of your stash independent of timeline.

[morninglightmountain]

We went with buying a condo, figuring that once we pay it off, it's a pretty sweet hedge against inflation. We love the idea of a paid for home. Read every argument about renting vs. buying we could find. In the end, it seems like more conservative people (us) like to buy, everything else being equal. It represents a lot of good stuff: hedge against inflation, further diversification of assets, forced savings...

Totally aware of all the drawbacks of owning property, but we figured since we bought a sensible home relative to our income and are not super aspirational people who would want to upgrade before the place was paid off--and we love our jobs and it's not likely we'll move anytime soon--it made sense in our situation. There are a lot of variables, not least of which being personality/risk aversion.

Thanks for your response!  What was the price/annual earnings ratio?  My salary (starting next year) will be $131K, and my SO will make another $50K.  So it seems conservative to me to buy a $400K townhome, but I'd be interested in how the ratio compares to yours.

Also, am I correct in guessing that you plan on living in the home for the foreseeable future?  When I'm 35 and "retired," I plan on moving to a lower cost of living area, so would preferably sell the property in 7-8 years.  I could rent it out but it would probably break even for monthly cash flow when accounting for vacancy expenses, maintenance, etc.

[morninglightmountain]

I went through this decision making process about a year ago. I found the NYT had made an interactive tool to address this very question:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

I then found another interactive tool that produced slightly different visualizations:
http://www.realtor.com/mortgage/tools/rent-or-buy-calculator/

Quick back of the envelope: plugging in the basic numbers you give ($450K mortgage, 2*$930 rent for you and SO) indicates that buying becomes cheaper after eight years. My interpretation of this result is that over the seven year time period you state it's a wash between the two.

My circumstances showed no clear winner, so I stuck with renting.

The second part of your question is to choose between stocks/bonds and cash. According to the WSJ, risk aversion is the biggest mistake people in their 20s make:
The Biggest Money Mistakes We Make—Decade by Decade
http://www.wsj.com/articles/the-biggest-money-mistakes-we-makedecade-by-decade-1477275181
(Google the title if you get the paywall)

I think it is consistent with the 4% rule on this website to suggest that stocks/bonds is a better asset class for most of your stash independent of timeline.

Thanks for the link!  It shows 7 years as the inflection point, assuming a 20% down payment, and very small appreciation.  So I'm basically in the same boat as you when you looked at this, and should probably choose to rent given the lower risk.  However, I can't discount the emotional appeal of owning my own home.  Lots to think about!

[englishteacheralex]

We went with buying a condo, figuring that once we pay it off, it's a pretty sweet hedge against inflation. We love the idea of a paid for home. Read every argument about renting vs. buying we could find. In the end, it seems like more conservative people (us) like to buy, everything else being equal. It represents a lot of good stuff: hedge against inflation, further diversification of assets, forced savings...

Totally aware of all the drawbacks of owning property, but we figured since we bought a sensible home relative to our income and are not super aspirational people who would want to upgrade before the place was paid off--and we love our jobs and it's not likely we'll move anytime soon--it made sense in our situation. There are a lot of variables, not least of which being personality/risk aversion.

Thanks for your response!  What was the price/annual earnings ratio?  My salary (starting next year) will be $131K, and my SO will make another $50K.  So it seems conservative to me to buy a $400K townhome, but I'd be interested in how the ratio compares to yours.

Also, am I correct in guessing that you plan on living in the home for the foreseeable future?  When I'm 35 and "retired," I plan on moving to a lower cost of living area, so would preferably sell the property in 7-8 years.  I could rent it out but it would probably break even for monthly cash flow when accounting for vacancy expenses, maintenance, etc.

Our annual combined gross income is $140k, and we bought the condo for $364k. The maintenance fees are $608/month. We live on Oahu, a unique real estate market. Property taxes are oddly low here (something like $50/month) and since it's a condo, the insurance is also very low. Our mortgage is a 30 year fixed at 3.75% and we don't have PMI. Appreciation has been going pretty well, and it's very much a seller's market.

Yes, we plan on staying in this condo at least another 6-7 years, for a total of at least 8-9 years. We are creatures of habit and we very much dislike change, so we might just stay indefinitely. We are planning on paying the whole thing off in 13 years (11 years to go). It is a small place--850 sq ft--and we have two children under 3. But we have lived on Oahu for 14 years and are used to much smaller living quarters than people on the mainland are accustomed to.

If we do move, the condo would be very easy to rent out due to the location, but the numbers might not work out.

We've never regretted the decision to buy this place. We pay a lot extra on our mortgage because we are risk averse and like the idea of building equity and the idea of having a paid-for house by the time our kids are in college. We save very aggressively in our 401ks, as well, but as I said before, the diversification that a sensible primary residence property represents to us is very appealing.

[morninglightmountain]

We went with buying a condo, figuring that once we pay it off, it's a pretty sweet hedge against inflation. We love the idea of a paid for home. Read every argument about renting vs. buying we could find. In the end, it seems like more conservative people (us) like to buy, everything else being equal. It represents a lot of good stuff: hedge against inflation, further diversification of assets, forced savings...

Totally aware of all the drawbacks of owning property, but we figured since we bought a sensible home relative to our income and are not super aspirational people who would want to upgrade before the place was paid off--and we love our jobs and it's not likely we'll move anytime soon--it made sense in our situation. There are a lot of variables, not least of which being personality/risk aversion.

Thanks for your response!  What was the price/annual earnings ratio?  My salary (starting next year) will be $131K, and my SO will make another $50K.  So it seems conservative to me to buy a $400K townhome, but I'd be interested in how the ratio compares to yours.

Also, am I correct in guessing that you plan on living in the home for the foreseeable future?  When I'm 35 and "retired," I plan on moving to a lower cost of living area, so would preferably sell the property in 7-8 years.  I could rent it out but it would probably break even for monthly cash flow when accounting for vacancy expenses, maintenance, etc.

Our annual combined gross income is $140k, and we bought the condo for $364k. The maintenance fees are $608/month. We live on Oahu, a unique real estate market. Property taxes are oddly low here (something like $50/month) and since it's a condo, the insurance is also very low. Our mortgage is a 30 year fixed at 3.75% and we don't have PMI. Appreciation has been going pretty well, and it's very much a seller's market.

Yes, we plan on staying in this condo at least another 6-7 years, for a total of at least 8-9 years. We are creatures of habit and we very much dislike change, so we might just stay indefinitely. We are planning on paying the whole thing off in 13 years (11 years to go). It is a small place--850 sq ft--and we have two children under 3. But we have lived on Oahu for 14 years and are used to much smaller living quarters than people on the mainland are accustomed to.

If we do move, the condo would be very easy to rent out due to the location, but the numbers might not work out.

We've never regretted the decision to buy this place. We pay a lot extra on our mortgage because we are risk averse and like the idea of building equity and the idea of having a paid-for house by the time our kids are in college. We save very aggressively in our 401ks, as well, but as I said before, the diversification that a sensible primary residence property represents to us is very appealing.

Glad to hear that the decision is working well for you.  We just visited HI in September (went around Oahu and Big Island) I think I could live with a small space given the opportunity.  Our 900 sq ft. apartment is pretty full, but it's mostly junk that we'd just dump if we moved cross country.  I used to teach English in South Korea, and my studio was about 150-200 sq feet!

I think long-term, there will always be excellent appreciation in HI.  The DC area is also a unique market because of all the Fed and contractor jobs, but I could see the bubble popping with the right administration (I don't think Trump will have much impact on prices).  The townhomes I'm looking at are halfway between DC and Baltimore and are much more reasonably priced than something in DC or Northern Virginia.

[clarkfan1979]

If you live in an expensive area, renting will probably put you in a situation in which you might have to move every 2-3 years to take advantage of the best rental deals. If you don't want to be mobile, maybe buying a little farther from the city center but still close to public transit is the answer.