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OP, you are correct in that $11k in property taxes on a $250K home is OUTRAGEOUS!! Where do you live? We were paying $10k for a $400k home in the suburbs of Chicago. Me moved across state lines into NW Indiana and now pay $2800 a year for property takes. If you want to buy, is it possible for you to move to a state that has lower taxes?
Buying a home is not for everyone, but there are advantages such as paying off the mortgage and not having a payment during retirement years. Also not having to worry about increasing rent over time, plus doing what ever you want to the property. Homeowners insurance costs are drastically different between states as well. We pay $700 a year for our home, but the same home would cost $1500 a year in Florida!
We'll have our house paid off before we're 50. We can (and will) invest the money we were paying on our mortgage. So not only is that "rent" we will no longer pay, we will actually be making money on it. Not to mention that we will be sitting on (well, living in) $500K that we could liquidate (or borrow against) if we really had to. Our property taxes (which are really high) and our insurance costs, which we will still need to pay, are far less than the average rent on a small, one-bedroom apartment in my metro area. And we live in a 4 bedroom, 3.5 bath, 3100 square foot house in a desirable area. We can always downsize when we want, pay cash, and pocket the profit.
time is your biggest friend when investing . the later you start the greater the amount of money you need to invest to get the same desired balance .
starting way earlier than 50 can grow far more money with less invested than starting at 50 can . in fact if you hit a period like the 15 years from 2000- 2015 where markets struggled to return even 2% real returns basically your results will be quite poor by age 65 .
so be careful trying to do the bulk of your investing late in the game . you don't want to be house rich and cash poor in retirement .
on the other hand we rented , took the money we would have bought with and had it grow to very very nice levels so we retired . we could buy multiple homes today after subtracting out all the rent we paid over the years .
it is all individual circumstance dependent as to which may be the best financial choice .
owning a home cuts costs , investing elsewhere can grow income .
they are not the same thing , ideally you need both . cutting costs only seems like more income until you bottom and can't cut costs anymore yet expenses keep rising .
this is why wall street gauges companies on profits ( which can come from cost cutting ) and also revenues ,
there is a sweet spot between the two .
don't forget a retired couple who went from renting a 3 bedroom apartment to a one bedroom may see greater cost cutting than a homeowner still maintaining a 4 bedroom house . so it is not about just owning or renting . it is the entire financial picture
Last edited by mathjak107; 05-22-2017 at 10:53 AM..
#1 - Buying a home is discretionary spending. All we really "need" is a cheap apartment. I'd certainly do better if I lived in a cheap studio apartment in an iffy area and invested the difference in the stock market. I don't do that because I'm willing to do discretionary spending to improve my quality of life.
#2 - The caveat to that is if you have children and care about public schools. Typically, the best public schools are in the affluent suburban towns where the professional people live. Those towns do their best to zone so there is no such thing as a cheap apartment. If you want the school system, you have to buy the single family home.
#3 - High property tax rates have at least some impact on home prices. If you have two identical towns where one has double the tax rate, the high property tax town is going to have cheaper property prices. It's all about qualifying for the mortgage. ...but towns aren't identical. There's the school system to consider. There are the town amenities. In many places, there's commute time to consider.
My girlfriend lives in a town with a $40 mill rate that assesses at 70%. I live a couple hours away in a town with a $10 mill rate that assesses at 100%. If you buy in her town, your property taxes are going to be at least as high as your mortgage. After you pay off your mortgage, you're still going to have high ownership costs. She rents. She just moved to that area recently and won't be there anywhere near long enough to justify buying even if it made sense to buy. The houses in that town are inexpensive compared to what I'm used to because of the big property taxes but the overall home ownership costs are still quite high because it's an easy commute to all the high wage white collar jobs in a place with iffy transportation infrastructure and the school system and amenities are good.
high property values don't usually happen in a vacuum . job potential and schools play a huge roll .
my son lives in westchester in scarsdale . the income potential is the same in hartsdale ,eastchester and scarsdale as they are right near each other and all very very nice area's . in fact if i had no kids in school , hartsdale would be a bargain ..
the difference in school systems is hartsdale -good / eastchester better/ -- scarsdale best . the difference in real estate taxes is insane between the 3 .
time is your biggest friend when investing . the later you start the greater the amount of money you need to invest to get the same desired balance .
starting way earlier than 50 can grow far more money with less invested than starting at 50 can . in fact if you hit a period like the 15 years from 2000- 2015 where markets struggled to return even 2% real returns basically your results will be quite poor by age 65 .
so be careful trying to do the bulk of your investing late in the game . you don't want to be house rich and cash poor in retirement .
on the other hand we rented , took the money we would have bought with and had it grow to very very nice levels so we retired . we could buy multiple homes today after subtracting out all the rent we paid over the years .
it is all individual circumstance dependent as to which may be the best financial choice .
owning a home cuts costs , investing elsewhere can grow income .
they are not the same thing , ideally you need both . cutting costs only seems like more income until you bottom and can't cut costs anymore yet expenses keep rising .
this is why wall street gauges companies on profits ( which can come from cost cutting ) and also revenues ,
there is a sweet spot between the two .
don't forget a retired couple who went from renting a 3 bedroom apartment to a one bedroom may see greater cost cutting than a homeowner still maintaining a 4 bedroom house . so it is not about just owning or renting . it is the entire financial picture
Was this addressed to me? I'm thinking it may be, since I said our house will be paid off by the time we're 50. We are in our mid/late 40's now. We have been investing since graduating from college, maxing out our 401Ks and IRAs. We have also saved enough in a 529 to cover both of our kids' college educations. We are probably in better shape than most people older than we are. Truth be told, we could probably retire comfortably in about 5 years. But we will wait until the kids are out of the house. They are still in middle/elementary school. The extra money to invest when the how is paid off is just bonus money.
many are not investing much early on . they are dumping as much as they can in to paying off their mortgage thinking they will make it up once the mortgage is paid . that is a bad idea as you need long periods of time to invest and really do well.
first starting in your 50's after a mortgage is paid and dumping in more later in life is not close to the effect of starting much earlier . not saying that is your case but just a general comment based on your comment about investing more after the mortgage is paid . you can't get back the lost time for those who were going to do that
At what point does renting win over buying or does it ever?
The main monetary benefit of homeownership is that you receive tax-free income in the amount of the fair market rental rate of the property. This is a bit of a weird concept, so let me explain it. Stay with me.
To see this, let's do a thought experiment.
Let's say you and I are the same age. We attended and graduated from the same schools with the same grades and the same degrees. We work for the same employer in the same jobs with identical salaries. We have the same debts, and the same investments. Our marital status is the same. We purchased otherwise identical houses with identical down-payments and identical mortgages. In fact, our houses are immediately adjacent to one another and we are next door neighbors.
That is, in every economic way that matters, we are identical. Let's call this "the base case."
Now, let's imagine our respective IRS Form 1040s. Each of us has income that is identical, deductions that are identical, credits that are identical. Our total total tax obligation is identical. Our IRS 1040s are identical except for our names & addresses & SS numbers.
Still with me? Hang in there. Let's show the alternative hypothetical which shows the difference.
OK, now let's imagine that instead of living in your own house, you become a landlord and rent your house to me. I become a landlord & rent my house to you. Each of us are both landlord and tenant. That's right, it is silly, but stay with me. Because our houses are otherwise identical, the fair market rental rate is the same -- let's say it is $3,000 per month. So, you pay me $3,000 in rent, and I pay you $3,000 in rent.
Now imagine our IRS Form 1040s. Each of us has the same income as the base case above, but now each of us also has $36,000 of rental income, so our AGIs are now $36K larger than the base case. Each of us has some landlord expenses and depreciation expense. Each of our total tax obligations is identical -- but now higher than in the base case.
So at the end of the day, each of us is worse off because we pay the IRS income tax on the extra rental income (less some extra deductions).
So you can see that a major benefit of homeownership is that you "pay yourself rent" but this phantom income doesn't show up on a 1040. That is tax-free income.
Over a lifetime, this adds up. Housing prices will go up and down - but over a lifetime, adding this extra "tax-free" income to your worth is very significant.
Is owning always better if property taxes cause your monthly housing payments on a 250k house to be $500-750 more than renting? If you add in maintenance, the amount is at least another $2500 per year. Rent goes up but so do taxes. At what point does renting win over buying or does it ever?
250k, 20% down, 11000 school and property tax =$1900ish
Rent 2 bedroom house/apartment =$1200-1400
Financially one might not be better then the other but the benefits of owning are well worth the additional cost in most cases in my opinion. Owing a home #1 freedom #2 privacy #3 peace in the right location. Renting you get none of that. To me those things are virtually priceless.
The incidence of any tax depends on the price elasticity of demand and price elasticity of supply. These are the slopes of the supply and demand curves we all learned about in Econ 101.
So, in a high property tax area, the right question to ask yourself is what portion of that high property tax is passed along to the renter. It is rarely the case that all of the property tax is borne either by the landlord (producer) or tenant (consumer). It will most likely be borne by a combination of the two.
Here is a hypothetical supply & demand chart where most all of the property tax is borne by the landlord ("producer" in the chart) and relatively little borne by the tenant.
Here is a hypothetical supply & demand chart where most all of the property tax is borne by the tenant ("consumer" in the chart) and much less by the landlord ("producer" in the chart).
You can create all the hypothetical charts in the world but none will negate the fact that 100% of the income in a rental is derived from the tenant and 100% of all expenses, including taxes, are paid from that income until such time as the expenses exceed that income. At that time (actually before) the landlord should have ceased operating the rental unit unless they simply have a need to lose money.
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