Rent or Buy debate

[soccerluvof4]

I just had a conversation today with my friend who sold his home a few months ago and is so happy to be renting. Granted he is a spender so for him it was more a decision on probably having more to spend than being frugal.  But in our area at least I can see where renting could very well be a better savings than home ownership of course again depending on your scenario.  Here is ironically an article i read when i got home today.

http://www.marketwatch.com/story/many-renters-have-enough-money-to-buy-homes-2014-05-02 

[Sunshine23]

I have been wondering this same question for myself as well. I know there are a lot of variables that would determine which is the better option. My problems right now are not having a down payment yet, and probably not-good-enough credit for a decent interest rate. Just recently started reading MMM and probably in need of a few face punches. I hope to have my entire situation improved within 1 year (like famous Mustachian 180-style), and then look at the details of buying vs. renting. Anyone here in the Salt Lake area in real estate??

[Eric]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

[Roland of Gilead]

If you rent how would you enjoy the experience of things like real estate taxes, sales commissions, new roofs, new furnaces, flood insurance, hazard insurance, earthquake insurance?

Seems like a lot of life experience that you would be missing.

[samburger]

No one enjoys renting so much as folks who can afford to buy. If you're stuck renting because you can't afford a house, it's the pits. If it's a choice, then it becomes a magical, magical experience.

I relish spending exactly no time and $0 fixing crap that breaks. I imagine I'll feel differently when I'm no longer working full time.

[Jamesqf]

If you rent how would you enjoy the experience of things like real estate taxes, sales commissions, new roofs, new furnaces, flood insurance, hazard insurance, earthquake insurance?

You don't think you pay for all that when you rent?  And meanwhile you have landlords telling you you can't have a garden, hang out your laundry, repair your car...

[Kaminoge]

Life choices are not always about the money, but you should always be clear about the money choice you are making.

I like this quote (from the article linked above).

I really think when it comes to home ownership it's very rarely a straight financial decision. It would be like basing the decision about whether to have a pet or a kid on a solely financial basis... missing the point a little.

Personally I love real estate. For me it's been a great investment and it's something I enjoy thinking/talking about. I come from a family that is very into real estate as a way to store/grow wealth. And yet having said that I've spent a total of 4 months of my adult life (I'm 40) living in something I actually owned. And I did that for financial reasons (to do with getting a government grant). Renting just makes much better sense given the lifestyle I've chosen for myself.

I do know though that I also love knowing I've got a foot (or several) in the property market because that way if I do want to "settle down" and live in my own place at some point I've kept my options open.

[bikebum]

I think it depends where you live. Where I live it makes financial sense to buy, so I did. If I lived somewhere like San Francisco, I'd rent.

[soccerluvof4]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/





Very good article , One I am going to share for sure.

I know in my own case I fight this all the time because I am one that has always owned my homes mortgage free. I have what some might call a mini-Mc Mansion and am not proud of it. Having 4 kids the space is nice but whether i can afford it or not is not the issue anymore. Add to that I bought the house during the real estate decline over 100k under appraised value even still being mortgage free I have 9300$ a year taxes. Maintenance is nuts and have now put into the house more than its appraised value. I justify it by saying I don't have a mortgage so I am at least not paying double for the house which is stupid I know.  In addition I don't see this area appreciating enough to get my money back.  So i fight the fight in 3.5 years one will be off to college and one will be in senior year of HS so do I build/buy the smaller house then outside of the school area we want to be in and open enroll or do it now .  This and college are my two biggest conflicts. I can afford the house as I said and am saving a ton but to me it still doesn't make it right. I spend every week looking and hoping for something to jump out at me that makes more sense.

[Mr. Frugalwoods]

Oh man, I could talk about this all day!

Reasons owning a house are awesome:

• No rent increases.  The mortgage is stable and if you buy in the right municipality then your property taxes will increase at a slow and predictable rate.
• Part of your mortgage payment is yours.  The principle is so sweet.
• Tax incentives for home ownership are stupidly awesome if you are in a high tax bracket.
• Opportunity to build value if you buy a place that needs work in a good area.  Even more so if you do like my wife and I did and buy a place that we know we'll want to keep as a rental in the future.
• Massive leveraged hedge against inflation.  Your mortgage payment will be the same in 10 years, no matter what prices have done.  In this low-inflationary period it's a great opportunity to lock a rate at the lowest you'll ever borrow money in your lifetime.

Reason why owning a house is the pits:

• Transaction costs are high.  Buying isn't so bad, but selling with realtor commissions really takes a bite out.
• It’s an illiquid asset.  If you suddenly need money but just put every penny you own into a downpayment... sadness.
• If you need to move, you can get screwed.  If you have a job change and you need to move during a real estate downturn then you are probably going to take a bath on the property.
• Downpayment amounts can be prohibitive.  If you put 20% down and you live in a hot urban market then you could be saving for a long time to make it happen.
• Maintenance can be costly.  If you aren't handy, this is going to suck.  Tradesmen know how to spot a sucker from a mile away and they will bleed you dry for the fun and profit of it.  There's also the hassle of coordinating repairs, taking time off work, and living with construction mess.
• Getting a mortgage with lots of student loan debt can be hard.  A lot of my generation can't take on a mortgage payment because their Debt to Income ratio is too high due to student loans.

TLDR; If you are quite handy AND you plan on staying in the house for a long time or renting it out: Buy.  Otherwise, sell.  I see people all the time live in a place for 5 years and then sell... it's almost always a bad deal.

[dragoncar]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Obnoxiously, opening that site sent my phone to download candy crush saga from the App Store.  Boooo...

[Jags4186]

What I thought was interesting about the article is that a $63k income was 175% what is needed to buy a $197k house..in other words all you need to make is 36k income to buy a 197k house.  Doesn't that sound a bit off to everyone?

I make roughly 95k and I can't figure out how to buy a 300k house!

[TomTX]

What I thought was interesting about the article is that a $63k income was 175% what is needed to buy a $197k house..in other words all you need to make is 36k income to buy a 197k house.  Doesn't that sound a bit off to everyone?

I make roughly 95k and I can't figure out how to buy a 300k house!

I considered when we bought this house for ~$128k, @ $50k income, to be a bit of a stretch.  Admittedly, we cleared $40k from the sale of the prior house.

[wtjbatman]

When I used to watch House Hunters all the time (I have a shame-thread about it here somewhere), I would laugh at the people who just had to have a house... but wanted one that had everything in brand new condition because they didn't want to do any work repairing/upgrading anything, and had a tiny yard because they didn't want to do any yard work.

Basically, two of the best aspects of renting.

[seanc0x0]

When I used to watch House Hunters all the time (I have a shame-thread about it here somewhere), I would laugh at the people who just had to have a house... but wanted one that had everything in brand new condition because they didn't want to do any work repairing/upgrading anything, and had a tiny yard because they didn't want to do any yard work.

Basically, two of the best aspects of renting.

That's always amused me as well.  Why take on a house and all the hassle that entails when you'd be better off renting?

The answer, of course, is the prevailing view that a house is a money-making investment rather than a money-sucking liability. 

I personally own a house, because I like the flexibility it gives me to do things that renting does not, like digging up the yard to put in a garden and putting up antennas (I'm a ham radio operator) which many landlords around here aren't too keen on.  We also got a deal on it (very cheap, bought from father-in-law), so it costs about the same as rent would with mortgage and maintenance.  I certainly don't look at my house as a magical ATM that I can tap whenever I want a new toy like some people in my neighbourhood, though.

[dcheesi]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Obnoxiously, opening that site sent my phone to download candy crush saga from the App Store.  Boooo...

For me it just 404'd. My guess is that your data provider is redirecting your failed URL lookups to one of their paid sponsors...

I had to use the Wayback Machine to read it. Apparently that site is having problems lately, since I saw someone else do the same thing.

EDIT: Wayback link: https://web.archive.org/web/20140208003449/http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

[dragoncar]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Obnoxiously, opening that site sent my phone to download candy crush saga from the App Store.  Boooo...

For me it just 404'd. My guess is that your data provider is redirecting your failed URL lookups to one of their paid sponsors...

I had to use the Wayback Machine to read it. Apparently that site is having problems lately, since I saw someone else do the same thing.

EDIT: Wayback link: https://web.archive.org/web/20140208003449/http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Nah, I got the page loaded, PLUS candy crush saga

[seanc0x0]

I like Jim Collins's take

http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Obnoxiously, opening that site sent my phone to download candy crush saga from the App Store.  Boooo...

For me it just 404'd. My guess is that your data provider is redirecting your failed URL lookups to one of their paid sponsors...

I had to use the Wayback Machine to read it. Apparently that site is having problems lately, since I saw someone else do the same thing.

EDIT: Wayback link: https://web.archive.org/web/20140208003449/http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/

Nah, I got the page loaded, PLUS candy crush saga

It's an ad on the page. The site owner probably doesn't even know it does it. I run into that all the time and as Apple won't allow me to install adblocking in Safari on iOS, I've just stopped using my phone for browsing. Not going to replace this iPhone with another when this one finally dies.

[mm31]

Renting is simply better for me. My rent is low enough in a nice part of town, I don't have to worry about housing-related repairs, and it gives me flexibility when it comes to traveling for extended amounts of time.

I'm in my 30s and I expect I'll be looking for a new job every 5-6 years in today's economy. It's really hard for buying to come ahead of renting when length of employment in one place can be as short as that. Even if I buy a house, my mortgage would have to be low enough so that when I change jobs, I don't have to worry about running out of money for 6-9 months (15% take-home would be bearable). 

As I wind down my career, I expect home ownership to make more sense form, but not right now.

[greaper007]

It really depends on where you live, and how often you move.   For a chunk of my working life I owned a home in one city, and rented a room or a bed in a crash pad in another city.   It sucked, but in the end paying an extra few hundred dollars a month on rent was way easier on my wife and I than moving every 6 months.

There are plenty of rent vs buy calculators out there.   I think the New York Times even had one of their website.

[m8547]

Oh man, I could talk about this all day!

Reasons owning a house are awesome:

• No rent increases.  The mortgage is stable and if you buy in the right municipality then your property taxes will increase at a slow and predictable rate.
• Part of your mortgage payment is yours.  The principle is so sweet.
• Tax incentives for home ownership are stupidly awesome if you are in a high tax bracket.
• Opportunity to build value if you buy a place that needs work in a good area.  Even more so if you do like my wife and I did and buy a place that we know we'll want to keep as a rental in the future.
• Massive leveraged hedge against inflation.  Your mortgage payment will be the same in 10 years, no matter what prices have done.  In this low-inflationary period it's a great opportunity to lock a rate at the lowest you'll ever borrow money in your lifetime.

Reason why owning a house is the pits:

• Transaction costs are high.  Buying isn't so bad, but selling with realtor commissions really takes a bite out.
• It’s an illiquid asset.  If you suddenly need money but just put every penny you own into a downpayment... sadness.
• If you need to move, you can get screwed.  If you have a job change and you need to move during a real estate downturn then you are probably going to take a bath on the property.
• Downpayment amounts can be prohibitive.  If you put 20% down and you live in a hot urban market then you could be saving for a long time to make it happen.
• Maintenance can be costly.  If you aren't handy, this is going to suck.  Tradesmen know how to spot a sucker from a mile away and they will bleed you dry for the fun and profit of it.  There's also the hassle of coordinating repairs, taking time off work, and living with construction mess.
• Getting a mortgage with lots of student loan debt can be hard.  A lot of my generation can't take on a mortgage payment because their Debt to Income ratio is too high due to student loans.

TLDR; If you are quite handy AND you plan on staying in the house for a long time or renting it out: Buy.  Otherwise, sell.  I see people all the time live in a place for 5 years and then sell... it's almost always a bad deal.

Correct me if I'm wrong, but my interpretation is that none of the mortgage payment is yours. If your house theoretically drops to $0 value, when you sell it you get nothing, and you never get any of the mortgage principal back. Of course if it increases in value you have the benefit of leverage, but in my area houses are so overpriced I can't count on them increasing any more than inflation.

Inflation is low now, but there's no guarantee it will be higher in the future. The fed is trying to increase inflation, but from the little I've read, it's not working too well.

My family has never lived in one place for much more than 5 years, so it's hard for me to imagine doing so either. I'm not against it, but there's always something unforseen that comes up.

[Mr. Frugalwoods]

Correct me if I'm wrong, but my interpretation is that none of the mortgage payment is yours. If your house theoretically drops to $0 value, when you sell it you get nothing, and you never get any of the mortgage principal back. Of course if it increases in value you have the benefit of leverage, but in my area houses are so overpriced I can't count on them increasing any more than inflation.

Inflation is low now, but there's no guarantee it will be higher in the future. The fed is trying to increase inflation, but from the little I've read, it's not working too well.

My family has never lived in one place for much more than 5 years, so it's hard for me to imagine doing so either. I'm not against it, but there's always something unforseen that comes up.

Certainly true that if the value of your house and the land underneath it falls to 0 then you won't be recouping any of that principal :-)  If you live near a nuclear power plant or on the outer banks of North Carolina... then that should be a real worry.  Otherwise, probably not looking at a 0 situation.

And fair point on talking about overvalued markets.  That's certainly something that makes a huge difference in a calculation.  Long term though keeping up with inflation is what you'd expect.  And at that rate of return you are getting back (someday, minus transaction costs) your principal.

[ysette9]

My first, good laugh of the morning from the linked article:

"The problem is a lot of those people don’t have $20,000 or $30,000 to make a down payment".

In my area, make that $200K - $300K to make a down payment and then you are talking reality!

[soccerluvof4]

When I used to watch House Hunters all the time (I have a shame-thread about it here somewhere), I would laugh at the people who just had to have a house... but wanted one that had everything in brand new condition because they didn't want to do any work repairing/upgrading anything, and had a tiny yard because they didn't want to do any yard work.

Basically, two of the best aspects of renting.

Cant stand that show anymore. Love it or List it or Property Brothers ! haha is about all i can handle now.  Also the realization of prices in Canada for housing YIKES! (most those shows filmed there). Ok , I do like buying in ALaska but never going to happen , just like the scenery.

[greaper007]

My first, good laugh of the morning from the linked article:

"The problem is a lot of those people don’t have $20,000 or $30,000 to make a down payment".

In my area, make that $200K - $300K to make a down payment and then you are talking reality!

Where do you live?   Park Ave?    I've lived all over the country, Cleveland, CT, FL, Dallas and now Denver.    You can buy a decent 3-4 bedroom house, in a good school district in any of those markets for about $250,000.    Now, it blows my mind when people mention that they can buy a house for less than $100k in some areas (though I assume it's not the best neighborhood or school district).   But I've never been anywhere, except for very trendy downtown areas, where houses can't be had for less than $2 million (assuming $200k is a 10% down payment).

Either you're making $300,000+ and you live in the only place that you can pull that kind of salary, or it's time to move.

[waltworks]

There is a LOT of variation in house prices around the US. Yes, in many places $250k buys you a great house in a great neighborhood. Other places it won't get you a studio. And if you want to live in the rust belt, $250k will practically buy you a city block some places.

But some of us like living at a ski resort, or a beach, or in a vibrant big city, and are willing to pay a premium for it. Nothing wrong with that decision and there's no "need" to move just so you can have a cheaper house unless money is your only object in life. FI is great but living somewhere you hate isn't worth quitting your job a few years sooner to many people.

-W

Where do you live?   Park Ave?    I've lived all over the country, Cleveland, CT, FL, Dallas and now Denver.    You can buy a decent 3-4 bedroom house, in a good school district in any of those markets for about $250,000.    Now, it blows my mind when people mention that they can buy a house for less than $100k in some areas (though I assume it's not the best neighborhood or school district).   But I've never been anywhere, except for very trendy downtown areas, where houses can't be had for less than $2 million (assuming $200k is a 10% down payment).

Either you're making $300,000+ and you live in the only place that you can pull that kind of salary, or it's time to move.