Home buying questions - economic benefit (Plano: lease, house, wedding)

[Transplanted99]

Originally Posted by serger

Well, currently this budget (400k) cannot buy that (above) in 75093 (one house pending, that's it). In Frisco, a bit better but not very much, maybe 20 houses.

Additionally, the OP was talking about 15 year mortgage, so the monthly is more.

Ok, maybe not 3 car garage. There is only one at $375K. But, drop the three car garage and there are seven properties between $375K and $425K. However, makes the case that it is not a simple apples to apples comparison.

As for 15 year term... payment would be $2.2K, under the same assumptions. Renting seems to come at a premium.

[Hacker1234]

The way I see it, if I buy a house the mortgage payment would be cheaper then if I rent a house the same size. So its cheaper and you build equity.

[Hacker1234]

Yes I am, it would cost like 1000 more a month if I rented a house just like mine. Saving that kind of money you can afford it when the AC goes out.

[FallFig]

If you rent a smaller place and invest savings wisely then renting trumps owning.

[EDS_]

Originally Posted by KBubby

You're not including taxes, insurance, maintenance. Buying a house is a lifestyle choice not an investment. You will NEVER recoup the money you pour into a house unless you pay for it in cash.

That's not correct. Wiping away all of the secondary issues homeowners are much wealthier than renters. The forced savings component of homeownership via mortgages is a big part of why. Savings is an investment.

I just ran the numbers a few days ago. Between what we paid for our house and what it is worth now minus upkeep, taxes and insurance etc. its been a significant net win.

[Hacker1234]

Would be hard to fit my family of 5 in a 2 bedroom house.

[Aceraceae]

Originally Posted by KBubby

You rent for now, buy for later. Most people don't need 5 bedroom homes with media rooms and 3 car garages when they buy them and overpay. Hence it's a lifestyle choice. Most families would do just fine in a 2bed 2bath apt.

Imagining just me, my wife, and 15 month old in a 2/2 apartment sounds like a nightmare.

[bubbyK]

Originally Posted by Hacker1234

Would be hard to fit my family of 5 in a 2 bedroom house.

There are families that does it. Again, lifestyle choice.

[Transplanted99]

Originally Posted by bubbyK

There are families that does it. Again, lifestyle choice.

The problem in these types of debates is that folks don't compare apples to apples, so end up arguing around each other.

So, while what you say is true, as a general statement, when buying vs renting the SAME property, as one goes up the chain in house value, they will find that owning is a better deal, over the long haul.

Of course, if one expects to move every three years, as an example, then the transaction costs probably eliminate that advantage.

IIRC, came across a report some time ago that said those in lower income brackets tend to move more frequently. These folks may be better off renting, unless it is the landlords who are driving them to move.

[Wittgenstein's Ghost]

Originally Posted by Transplanted99

So, while what you say is true, as a general statement, when buying vs renting the SAME property, as one goes up the chain in house value, they will find that owning is a better deal, over the long haul.

I don't understand this reasoning. As houses become more expensive, their cost/rent ratio increases. A $125k house may rent for $1250 per month, but a $750k house doesn't rent for $7,500 per month. If we assume that taxes, insurance and down payment all increase linearly, it makes more sense to buy if one lives in a cheap house rather than an expensive house.

In fact the entire answer to this question depends on what price point we're discussing. Unless one is leveraged heavily (small down payment) in a market that is rising quickly, buying a million dollar house will probably not end up beating renting. For example, I glanced at the Highland Park rental market. There are several properties for rent in the $5000-6000 range, and these properties are probably worth about $1.5 million. The mortgage on that will be around $7,000 per month (and that's at 30 years with today's low rates). The taxes will be around $2500 per month, and let's say insurance is $500 (guessing). That's $10,000 per month, or $120,000 per year for PITI. Had one rented at $5,500, however, annual housing costs would have only been $66,000. That's a savings of $54,000 per year, and we haven't even talked about upkeep yet. If we were to figure that over the course of a 30 year mortgage, one is going to put on two roofs and replace HVAC systems once and do one large remodel (along with other small stuff), a reasonably conservative estimate is that upkeep would be somewhere around $180,000 during the life of the loan, excluding lawn maintenance and utilities (which are expenses for owners and renters). So, breaking it down in nominal dollars, we have the following:

Amount saved per year in direct costs by renting: $54,000
Average amount saved per year in upkeep by renting: $6,000
Total nominal amount saved per year by renting: $60,000
Sum 1: Total nominal amount saved over 30 years by renting: $1,800,000

Now, there are some perks for the owner here that have to be considered as well. First, on a house this expensive, the interest and property tax deductions will be itemized. Average interest over the life of the loan will be about $3,300 per month (I rounded) and taxes will be $2,500 per month. That gives an annual total of about $70,000. If one is in the 33% tax bracket, that is a savings of about $23,000 per year.

Amount saved per year through tax deductions by owning: $23,000
Sum 2: Total nominal amount saved over 30 years by owning: $690,000*
* This number isn't completely accurate, because property taxes will increase with home values. Therefore, this number isn't actually a nominal number. However, the increasing tax write-off due to increasing property taxes is more than compensated for by the increased cost of property taxes themselves as the house value rises.

At this point, we have a nominal advantage of $1,110,000 for renting. There are still two issues outstanding, however, and those are the increasing value of the property and the various issues with the down payment. Let's start with the increasing property values. The historical real appreciation rate for housing in the US is probably somewhere around 3.5%. The Case-Shiller index puts it at 3.4%. Remember, we're interested in the average over 30 years, and that's going to include crashes and shifting desirability for cities and neighborhoods. If our $1.5 million house appreciates at 3.5% over 30 years, we're looking at a value of $4.2 million when it's all said and done (that is a nominal figure). Now, here's where there's some variability. Let's assume that we put 20% down on our house when we bought it, which would be $300,000. And let's say that, had we decided to rent, we would have averaged 8% on our investment of that $300,000, which is about what the S&P has averaged since the 1980's. That would give us $3.02 million at the end of thirty years.

Nominal value of our paid-off home in 2045: $4.2 million
Nominal value of our investment had we rented: $3.02 million
Sum 3: Total nominal increased wealth due to house value over investment value: $1.18 million

Sum 1 - Sum 2 - Sum 3= -$70,000

So, were we actually $70,000 better off by buying? No, because I actually forgot to include one important factor: investing our monthly savings over 30 years. We had a nominal advantage of $1,110,000 over 30 years without including the end value of the house. That is about $3,100 per month. If we invested that $3,100 in the same 8% investment, we would have about $4.6 million at the end of 30 years. Subtracting out our $1,110,000 principle because we've already counted it, we would have earned about $3.5 million in interest over those 30 years.

So, in this scenario, we have a nominal advantage of about $3.5 million. At an inflation rate of 3%, that's $1.44 million in real terms that we save by renting -- almost the value of the house itself.

In conclusion, if we're looking at a $1.5 million house, it is probably cheaper to rent. If we're looking at a $125,000 house, it is probably cheaper to buy. Somewhere in between is that magic line, and where that magic line is also depends on one's down payment (how leveraged their investment is), interest rate, length of time holding the house and return on investments.