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Hi everyone. I'm deciding whether to buy or rent a house but i'm not clear on the advantage of owning a home from a purely financial persective and I was wondering if someone could help me out. From what I know when buying a home you have to save for a rather large down payment (ideally 20%), pay closing costs, pay down a mortgage, pay for maintenance and upkeep and pay property taxes. Would this not be more expensive than renting a cheaper house or apartment in the long run since maintenance and taxes would be ongoing? And wouldn't property taxes be the same as paying rent even after paying off a mortgage? I assume you could lose your house if you can't afford the taxes. From what i've read you can build a lot of wealth through owning a home but how would you be able to access that wealth without selling the house? I'm assuming a house is bought to live in long term and not just to sell for profit.
Hi everyone. I'm deciding whether to buy or rent a house but i'm not clear on the advantage of owning a home from a purely financial persective and I was wondering if someone could help me out. From what I know when buying a home you have to save for a rather large down payment (ideally 20%), pay closing costs, pay down a mortgage, pay for maintenance and upkeep and pay property taxes. Would this not be more expensive than renting a cheaper house or apartment in the long run since maintenance and taxes would be ongoing? And wouldn't property taxes be the same as paying rent even after paying off a mortgage? I assume you could lose your house if you can't afford the taxes. From what i've read you can build a lot of wealth through owning a home but how would you be able to access that wealth without selling the house? I'm assuming a house is bought to live in long term and not just to sell for profit.
Being from the old school on this topic I say buy if you're going to put down long term roots whereas renting makes more sense if you're going to move often.
I don't buy this crap about flipping houses to make money. Houses to me are to make a home with and a work a day job is to make money with.
Yeah, I know many will think I'm outta step with the economy but I didn't get slammed when the housing market collapsed either.
The problem with the old mantra of viewing housing as a win-win investment in the long term is the latter premise itself. The concept of long term home ownership is disingenuous to begin with. The American labor landscape has morphed into a country of perma-nomad transplants; the average american unloads, or is forced to unload, properties in 9 years. Ergo you're never in the house long enough to realize a profit substantial enough to offset the transactional costs of home purchasing et al, when compared to renting.
Additionally,mortgage deductions are a joke. Spend a dollar to save 35 cents. The very premise is only backed by the idea that it makes sense "since you're gonna do it [have a mortgage] anyways". Bunk. Renting would suffice. Mortgages are hardly a constant in life.
So, if "long term housing tenure" is a myth in this country, and mortgage deductions are hardly a by-product of a bona fide "necessity" [mortgage-holding], then the only remaining justification is non-economic. You just WANT to dwell in a house. That's fine, but don't sugarcoat it on economic justifications, 'cause for the median american worker construct, renting outperforms "owning".
It's just like boat or airplane owners (latter which like houses, track appreciation around the inflation line) who simply cannot beat the cost of renting, but choose to rationalize it away over simply admitting they just want it.
I'd say short term, only buy if you can beat market rent AND you can afford to not miss the downpayment (pretty tall order if you ask me). Don't fudge the numbers and click your heels about how long you think you'd be able to stay in an area or specific employer. The statistics are against you. Just look on CD and count how many sob stories exist here about the median american family who swore they would NEVER see that layoff, it just wasn't predictable, we'll be here to see our children grow, we'll be here forever, they said. Bull. And there they are with an anchor house with spouses across state lines. I'm telling you, unless you're beating market rent or simply can afford to not miss the downpayment if it went down the drain for your troubles of calling the house you own, I'd rent.
Good luck
It is also a highly iliquid form of asset. What's the point of having the whole egg on a property, where I have to remove the roof above my children so I can tap into the cash to exchange for the utility I need today? It's insane.
In certain markets, where people are moving to - say, Seattle - the property market will certainly remain strong over the long term, so saying that maintenance and all that is not worth it, you really have to take a look at two things: the financial side, and the personal side.
The personal side is attractive. No neighbors with a thin wall separating you from them (unless you buy a condo to which I say ... unless you live in a highly dense area, where its unavoidable, like NYC, or enjoy noise, ... why?), you can do whatever you want with them, and if you really like an area, even if the workforce has changed to a set of permanent nomads, you will be able to find jobs in your area (ideally) to sustain your life. It also makes raising a family better for the kids.
From a financial standpoint, if the cost to own is sufficiently high enough to not justify buying vs. renting, then by all means rent. Seattle is a good market for this type of analysis. A 1250 sq. ft. house in Seattle these days will run you around $400k. To put 80k down and get a typical 5.5% mortgage, you would be paying around $1450 a month. Throw in taxes, maintenance, and utilities, it's more like $2100 a month. If you rent, you could probably get the same house for something like $1400 a month, no taxes, and maybe cut a deal with the homeowner saying you'll upkeep the place if you get a discount. You can save about $400 a month this way.
BUT, the housing market in Seattle is robust. People are still moving here. Despite the downturn, certain neighborhoods only saw a leveling out of home value, no drop. The area is beautiful, and has high tech jobs (and more being created). So, you have to make a financial choice that boils down to:
Do you think you could take that $400 a month savings in renting a place and invest it in something to beat the long-term appreciation of the house?
Most people would argue that in most housing markets it would take about 10 years to recoup the losses and break even with investing in the market at the initial outset, assuming (to my local market) a 2.5% appreciation of home value per year vs. a 6% return in investing in the market compounded with monthly savings put in.
That 10 year rule is pretty constant, with some exceptions depending on your situation and your local market. So, I would wager that if you aren't going to stay in a house for 10 years, I wouldn't bother buying yet and sve your pennies. Further, I would go so far as to say that you shouldn't buy a house if you're single, as single guys and girls tend to be the first on the chopping block (unless you have significant experience) at any job, so being mobile is a good thing.
... owning a home from a purely financial perspective ... large down payment (ideally 20%), pay closing costs, pay down a mortgage, pay for maintenance and upkeep and pay property taxes.
You forgot insurance, extraordinary maintenance and, if you are not handy (from lawn/landscaping/gardening to plumbing/pool, painting, electricity, masonry, roofing, etc.) the time and effort necessary to coordinate all the maintenance, ordinary and extraordinary. Plus, as mentioned, the opportunity cost of not investing all these financial resources in an income-producing business and/or financial investments.
Quote:
Originally Posted by ALINOH
From what I've read you can build a lot of wealth through owning a home but how would you be able to access that wealth without selling the house?
Wealth is in the heart.
The extent of a residential real estate investment in a given place should be proportional to the amount of heart invested in the local community.
Otherwise, as you have already surmised, in order to recoup all the costs mentioned above, especially mortgage, and generate significant net capital gains (not just sell price - buy price, an illusion), you need to sell at the peak of the periodic speculative bubbles, rent while waiting them out, and buy again at the trough.
Generally speaking, unless you can pay cash outright and/or have serious long-term heart invested in the local community, don't do it.
Buy a home only if you plan on staying there for the rest of your life, are handy, a Do-it-yourselfer, have enough money to pony up when your a/c, furnace, foundation (insert item here) goes on the blink, etc, otherwise RENT!! I have done the homeowner bit (for 10 years) and am now renting. I prefer to rent although we are leaning into buying this rental in the future (when prices go even lower and the landlord gets desperate for cash mwahahaha!! )
But the joys of ownership are .....well there aren't really many,unless you call dishing out thousands in home improvements a joy.
The problem with the old mantra of viewing housing as a win-win investment in the long term is the latter premise itself. The concept of long term home ownership is disingenuous to begin with. The American labor landscape has morphed into a country of perma-nomad transplants; the average american unloads, or is forced to unload, properties in 9 years. Ergo you're never in the house long enough to realize a profit substantial enough to offset the transactional costs of home purchasing et al, when compared to renting.
Additionally,mortgage deductions are a joke. Spend a dollar to save 35 cents. The very premise is only backed by the idea that it makes sense "since you're gonna do it [have a mortgage] anyways". Bunk. Renting would suffice. Mortgages are hardly a constant in life.
So, if "long term housing tenure" is a myth in this country, and mortgage deductions are hardly a by-product of a bona fide "necessity" [mortgage-holding], then the only remaining justification is non-economic. You just WANT to dwell in a house. That's fine, but don't sugarcoat it on economic justifications, 'cause for the median american worker construct, renting outperforms "owning".
It's just like boat or airplane owners (latter which like houses, track appreciation around the inflation line) who simply cannot beat the cost of renting, but choose to rationalize it away over simply admitting they just want it.
I'd say short term, only buy if you can beat market rent AND you can afford to not miss the downpayment (pretty tall order if you ask me). Don't fudge the numbers and click your heels about how long you think you'd be able to stay in an area or specific employer. The statistics are against you. Just look on CD and count how many sob stories exist here about the median american family who swore they would NEVER see that layoff, it just wasn't predictable, we'll be here to see our children grow, we'll be here forever, they said. Bull. And there they are with an anchor house with spouses across state lines. I'm telling you, unless you're beating market rent or simply can afford to not miss the downpayment if it went down the drain for your troubles of calling the house you own, I'd rent.
Good luck
It is also a highly iliquid form of asset. What's the point of having the whole egg on a property, where I have to remove the roof above my children so I can tap into the cash to exchange for the utility I need today? It's insane.
Great points.
Quote:
Originally Posted by eskercurve
In certain markets, where people are moving to - say, Seattle - the property market will certainly remain strong over the long term, so saying that maintenance and all that is not worth it, you really have to take a look at two things: the financial side, and the personal side.
The personal side is attractive. No neighbors with a thin wall separating you from them (unless you buy a condo to which I say ... unless you live in a highly dense area, where its unavoidable, like NYC, or enjoy noise, ... why?), you can do whatever you want with them, and if you really like an area, even if the workforce has changed to a set of permanent nomads, you will be able to find jobs in your area (ideally) to sustain your life. It also makes raising a family better for the kids.
From a financial standpoint, if the cost to own is sufficiently high enough to not justify buying vs. renting, then by all means rent. Seattle is a good market for this type of analysis. A 1250 sq. ft. house in Seattle these days will run you around $400k. To put 80k down and get a typical 5.5% mortgage, you would be paying around $1450 a month. Throw in taxes, maintenance, and utilities, it's more like $2100 a month. If you rent, you could probably get the same house for something like $1400 a month, no taxes, and maybe cut a deal with the homeowner saying you'll upkeep the place if you get a discount. You can save about $400 a month this way.
BUT, the housing market in Seattle is robust. People are still moving here. Despite the downturn, certain neighborhoods only saw a leveling out of home value, no drop. The area is beautiful, and has high tech jobs (and more being created). So, you have to make a financial choice that boils down to:
Do you think you could take that $400 a month savings in renting a place and invest it in something to beat the long-term appreciation of the house?
Most people would argue that in most housing markets it would take about 10 years to recoup the losses and break even with investing in the market at the initial outset, assuming (to my local market) a 2.5% appreciation of home value per year vs. a 6% return in investing in the market compounded with monthly savings put in.
That 10 year rule is pretty constant, with some exceptions depending on your situation and your local market. So, I would wager that if you aren't going to stay in a house for 10 years, I wouldn't bother buying yet and sve your pennies. Further, I would go so far as to say that you shouldn't buy a house if you're single, as single guys and girls tend to be the first on the chopping block (unless you have significant experience) at any job, so being mobile is a good thing.
Thanks for the great post. But even if a home value could beat putting money in the market wouldn't that issue become moot if you plan on staying in a home for as long as you can since you can't really gain cash without selling it? I think your point of the personal side of home ownership and the quality of life issue is truly the key whether to buy or not.
Quote:
Originally Posted by CTR36
Buy a home only if you plan on staying there for the rest of your life, are handy, a Do-it-yourselfer, have enough money to pony up when your a/c, furnace, foundation (insert item here) goes on the blink, etc, otherwise RENT!! I have done the homeowner bit (for 10 years) and am now renting. I prefer to rent although we are leaning into buying this rental in the future (when prices go even lower and the landlord gets desperate for cash mwahahaha!! )
But the joys of ownership are .....well there aren't really many,unless you call dishing out thousands in home improvements a joy.
Thanks. May I ask why you're leaning towards buying if you prefer renting?
People almost always say buying is better. But you guys all make real good points. My mother owned a house for some years. Furnace the yard plumbing ect it is always something and you have to cover it. I think most home owners would be in shock if they kept a running tab for 30 years. It cost so much to up keep a house. Everybody always says my hose payment is x they never add in any other cost. Hindsight2020 love the post people are not staying in one area for 30 years or even 10 years. Layoffs ect they are chasing jobs. Portland Boston back to LA then back to Boston. The traransactional cost eats up your profits. Your lucky to break even. Most home owners need two incomes afford their home. These days somebody will lose their job. You or your wife will lose your job then good luck with that home payment. Jobs are no longer stable thus the game has changed. Owning a home will not be a good deal in the future for most people.
Further, I would go so far as to say that you shouldn't buy a house if you're single, as single guys and girls tend to be the first on the chopping block (unless you have significant experience) at any job, so being mobile is a good thing.
Really? - you must be a really old-timer or something. Where do you work I've never heard of singles being more likely to be laid off.
There is a rule of thumb that if you divide the housing price by 20 and your rent is higher then you are slightly better of buying. It is just a rule of thumb though. If you want a real answer use excel and put the assumptions into a spreadsheet.
in-sour-home-market-buying-often-beats-renting: Personal Finance News from Yahoo! Finance (http://finance.yahoo.com/real-estate/article/109359/in-sour-home-market-buying-often-beats-renting?mod=realestate-buy - broken link)
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