Is it worth buying a house in Texas if you want to pursue FIRE?

[blackomen]

Fact: Texas has no income tax.

Fact: Texas has some of the highest property and sales taxes in the country.

Fact: Due to recent changes in the tax code, you can't deduct your property taxes (after a certain point) from your federal taxes.

Fact: Landlords can still deduct property taxes (and mortgage interest) normally since they're business expenses.

So by this reasoning, it seems like the best strategy for pursuing FIRE in Texas is to earn as much money as possible while renting a modest apartment.  Sure, you still indirectly pay for property taxes while renting because the landlord needs to pay them and that expense is passed down into your rent.  However, as far as I understand, property taxes are a business expense for a landlord so they can deduct as much of it as they can while a homeowner is limited to how much they can deduct in these taxes.

Let's say property taxes are 3% a year and the average home appreciates 8% a year in Texas.  For a landlord, that's an effective gain of 8 - 3 = 5% a year for the property (down to 2-3% after factoring in inflation.)  8% is pretty optimistic for Texas since there's a huge supply of land, unlike space constrained regions like California and Florida.  After not being able to deduct taxes and having to pay taxes on all nominal gains (not just after inflation gains), that 2-3% inflation adjusted returns become maybe 0-1% if it's even positive at all.

Is there any serious flaw in my thinking here?  I don't see any financial incentive to buying a house here vs renting due to this reasoning.

[use2betrix]

In many places, the rent is as much if not more than what the mortgage + property taxes are. With the mortgage, you are at least putting equity into the place. I have seen a lot of 2% - 2.2% Property taxes in Texas, but I don’t think i’ve seen 3%. (I’ve lived in Texas off and on, many times)

If I knew I was going to be in an area of Texas for very long term, I definitely would not be opposed to buying.

[CheapScholar]

Like use2betrix says, the facts you state don’t automatically mean that renting is better than buying.  After all, landlords still need to make money.  And they make money off of you, not just deducting property taxes.

I do think there’s a lot to be said about not FIREing in a state like TX if you have the will and ability to go someplace else.  I think post FIRE keeping property taxes low is at least a top 3 priority.  Just my opinion, but if you’re going to be in TX for 5 years or more, it might make sense to buy or at least check the rental cost compared to home ownsership costs (factor in home equity obviously).

[wenchsenior]

Funnily enough, I just ran some rough numbers on the two houses we own; and in our part of Texas, it's usually slightly cheaper to buy or it's approximately break-even (but without all the headache of being a landlord, which was my angle) in regard to houses. Not sure about renting an apartment.

E.g., Our house A (3/2/2 1600 sq ft; newer w/less upkeep) would cost ~160K to buy, and you could charge ~$1200-1400/mo rent.
        Our house B (2/1/1 1100 sq ft, WW2 era/more upkeep) would cost ~75K, and you could charge $900-1100 rent.

[BicycleB]

Texan for decades, FIREd here. Like @CheapScholar, I don't think the factors you quote are determinative.

I think a wiser approach would simply be to consider the costs vs benefits of owning vs renting, as well as you can estimate them, based your particular life situation (what stage of life you're in, the income you get from work, whether this is a good place for your work, how long you'd like to stay, etc).

Focus on particular markets, not the whole state, when choosing whether to buy or rent. Killeen is so cheap for purchasers it might save you quite a bit to buy there, if you're going to stay there for some reason. Austin is a different story; I live there and consider the buy vs rent decision very non-obvious for now.

@Axecleaver once circulated the rule of thumb that in markets where a house's purchase price is less than 15 times annual rent, it often makes sense to buy; if price is 21 or more times the rent, better to rent; in between, purely a personal decision. The whole state was under 15 in the past, but now some cities are pricier than that.

Re property tax vs income tax, the impact depends on individual factors. Property tax is part of your rent, that's not the point. The point is that you're going to pay some property tax for your residence, but avoid tax on your income, so the trade off depends on how much property you pay for vs how much income you generate. If you have high income and stay thrifty in your housing choices, Texas can give an advantage relative to other states.

I once saw a comparison of various American high-tech cities that tried to take a fairly Mustachian approach to spending while assuming a tech worker's salary, calculating where the hypothetical worker could best accumulate wealth.  Sorry I don't have the link or the right search terms, but Austin came up #1. It's the most expensive real estate market in the state though. I have begun to see comments that people are coming to Austin to create careers, but not to stay permanently. Earn and rent is a legitimate strategy here. In Dallas it's less obvious because AFAIK there are parts of town in each of the three purchase/rent ratio ranges.

Elsewhere in the forum, landlords buying rentals have found very good ratios of rent to purchase price from a landlord's perspective by buying in other areas. Whether to buy depends on your goals and the market you look at.

[AlotToLearn]

Interesting topic. I would not assume normal appreciation of 8 percent annually in TX or any state, as we are likely going to see a market correction (not recession) in the next 18-24 months. That said, owning still has benefits that aren't just financial. It just depends on your lifestyle and preference. I have friends who love renting and never will own. Some of those same friends also love the single life and will never marry nor have kids. I don't judge them on either decision.

[blackomen]

Texan for decades, FIREd here. Like @CheapScholar, I don't think the factors you quote are determinative.

I think a wiser approach would simply be to consider the costs vs benefits of owning vs renting, as well as you can estimate them, based your particular life situation (what stage of life you're in, the income you get from work, whether this is a good place for your work, how long you'd like to stay, etc).

Focus on particular markets, not the whole state, when choosing whether to buy or rent. Killeen is so cheap for purchasers it might save you quite a bit to buy there, if you're going to stay there for some reason. Austin is a different story; I live there and consider the buy vs rent decision very non-obvious for now.

@Axecleaver once circulated the rule of thumb that in markets where a house's purchase price is less than 15 times annual rent, it often makes sense to buy; if price is 21 or more times the rent, better to rent; in between, purely a personal decision. The whole state was under 15 in the past, but now some cities are pricier than that.

Re property tax vs income tax, the impact depends on individual factors. Property tax is part of your rent, that's not the point. The point is that you're going to pay some property tax for your residence, but avoid tax on your income, so the trade off depends on how much property you pay for vs how much income you generate. If you have high income and stay thrifty in your housing choices, Texas can give an advantage relative to other states.

I once saw a comparison of various American high-tech cities that tried to take a fairly Mustachian approach to spending while assuming a tech worker's salary, calculating where the hypothetical worker could best accumulate wealth.  Sorry I don't have the link or the right search terms, but Austin came up #1. It's the most expensive real estate market in the state though. I have begun to see comments that people are coming to Austin to create careers, but not to stay permanently. Earn and rent is a legitimate strategy here. In Dallas it's less obvious because AFAIK there are parts of town in each of the three purchase/rent ratio ranges.

Elsewhere in the forum, landlords buying rentals have found very good ratios of rent to purchase price from a landlord's perspective by buying in other areas. Whether to buy depends on your goals and the market you look at.

Austin (and DFW) are probably the best deal for tech workers who hate snow (but can tolerate it occasionally, which is me) from what I know. If you have any other suggestions for low COL tech friendly cities that seldom see snow, do let me know.

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