Renting v Buying?

[Chicos' Buzz Scandal Countdown]

Alright I'm putting it to Scoop Nation to drop some experience on me....

I'll be moving to Chicago for work in a few months, and the fiancé and I will be living around Lincoln Park area. The apartments we're looking at are around $2k/month.

I know we'll be there at minimum 4 years, and likely longer.

We would be able to comfortably get approved for a $300-350k house with a 20% down payment, netting a similar or slightly less than 2k monthly payment.

If we rent for 4 years, that is an automatic $96k completely out the window.
If we buy a 300k place and then sell it 4 years later:
1) We'll have an interest tax deduction over that time
2) As long as we don't take a loss of $96k or more over that time (buying/selling fees... Taxes, improvements and appreciation/depreciation)... Don't we come out ahead?

I understand that the "rule of thumb" is whether you'll be in your house ~5-7 years at least in order to justify the closing and selling costs, but compared to renting at a similar monthly payment over that time.... Even if we only got 80% of what we paid wouldn't we still come out ahead in that timeframe versus renting?

What am I missing?

[Spaniel with a Short Tail]

Your analysis is spot on from my perspective, but be wary of a potential drastic increase in property tax for Chicago due to a State mandate to increase police and fire pensions in 2015. Potentially in the neighborhood of 50%. Also, make sure you are considering insurance, tax and maintenance expenses over your ownership period.

[MarquetteDano]

I am not saying you should or shouldn't buy, but some things to consider:

• I live in Chicago and it has turned into a seller's market, especially areas like Lincoln Park
• You are comparing an apartment to a house.  Not a fair comparison.  A condo to an apartment would be closer.  As a house will be a lot more of your time than an apartment.   If you are talking a condo you need to add in the monthly HOA to your numbers.  If you are talking a house you will spend more of your time on it versus going to your landlord
• If you rent an apartment that is $60-$70k you could invest right now (instead of a down payment).  That $60-$70k COULD do better than real estate prices if it is invested correctly
• You didn't include the cost of interest, even after the tax advantages, in your numbers.  Even with a 20% down payment you could pay north of $30,000 in interest even after the tax advantages
• You didn't include real estate taxes and the increased amount of insurance, additional utilities, selling closing costs which INCLUDE commisions

Bottom line is your number is not $96,000.  The math could be much closer to something like this as an example:

Assume 4 years:

Monthly HOA:  $200 (or improvements if a house)
Yearly Real Estate Taxes: $4,000
Yearly Additional Insurance: $1,000
Yearly loss of return of $70,000 down payment @6%= $4,200 (conservative not compounding either)
Yearly Additional utilities usually included in rent:  $1,800
Closing cost sale at 5% after fees and commissions:  (350K @ 5%) = $17,500
Total interest paid after four years: $30,000

INCLUDING for tax advantages, after four years that is $96,000 less $70,000 which is $26,000.  So now your prices only have to drop $26,000 versus a $350,000 place (7.4%) and you are even.

[brandx]

Your analysis is spot on from my perspective, but be wary of a potential drastic increase in property tax for Chicago due to a State mandate to increase police and fire pensions in 2015. Potentially in the neighborhood of 50%. Also, make sure you are considering insurance, tax and maintenance expenses over your ownership period.

Normally, I would consider your situation a push, but because of the housing market over the last 5-6 years, I think now is a pretty good time for purchase.

[Chicos' Buzz Scandal Countdown]

Appreciate the extra eyes on this.

MarquetteDan - really solid points here especially; appreciate this type of informed pushback!

[keefe]

What am I missing?

What you are missing young man is putting a wedding ring on that woman's left hand. There should be no discussion of cohabitation until you have consecrated your relationship.

[MU82]

In addition to the excellent food for thought served up by MarquetteDano, I'll throw in my 3 cents ...

Many homeowners don't think (or don't want to think) about how much it costs to own a house above and beyond the mortgage. With a house, it's always something. Folks who demean renting always talk about money "thrown away." For sure, that's a favorite line of -- wait for it! -- real-estate agents. Let me tell you, there are lots of ways to throw away money when owning a house. During our 12 1/2 years as Chicago homeowners (1994-2007), our property taxes quadrupled. Plus, you want the house to be nice, right? So you're always sinking money into it to rehab the kitchen or spruce up the bathroom.

We sold our Chicago house in 2007 and we thought we'd buy again soon, so we subleased an apartment for 4 months. Then the market went into the crapper, so we stayed for another year. And then another. And then another. Our 4-month stay turned into 40 months.

And in that time, I came to appreciate a lot about renting. For 2000/month, we lived in a big 2BR, 2BA apartment run by the Wirtzes -- yes, those Wirtzes. I went in with great trepidation but it was quite nice. Our utility costs were extremely low (unlike those in most houses), anytime anything needed fixing it got done immediately (because they have a large maintenance staff), we had a doorman and excellent security. It was at Wellington and Sheridan, an excellent Lakeview address. We lived on the 17th floor and had views of the lake and downtown. The bus stop was outside our door, the el just a few blocks away. We had restaurants and shopping and entertainment venues all around us. I'd live there again in a heartbeat! A halfway decent condo in that neighborhood went for $750,000. Houses were well over a mill. That $2k for rent was a bargain.

In addition to costing less (compared to owning) than many people think, what I really liked about renting was that we had options. If we didn't like the place, we could move to another. If we wanted to relocate out of the area (which we did in 2010), we could do so without having a house to sell. It gave us a lot of freedom, which was empowering.

After we moved out of the state, I would have kept renting but my wife really wanted to own a house again. So we bought. Owning a home is as much a state of mind as anything -- certainly wanting to be a homeowner is a better, smarter motivation than expecting to make a profit. I still miss a lot about renting, though.

My initial thought after reading your post was: "Where the hell are you going to find any house worth owning (or even any house not worth owning) in or near Lincoln Park for 300k-350k?" You can't even get a fixer-upper in serious disrepair for that. Developers are paying 500k or more for falling-down shacks so they can tear them down and build $5 million mansions. We lived near the Damen-Addison intersection (several blocks away from Lincoln Park), and tiny bungalows there were going for 300-350k ... in 1996!

These are always difficult decisions because there is so much $$$ on the line. I wish you the best of luck.

[Hards Alumni]

Buy, I have a friend selling her and her husband's place!

Technically, its a condo.

[Spotcheck Billy]

reading this thread helps me to appreciate the lower cost of living where I am

[damuts222]

Normally, I would consider your situation a push, but because of the housing market over the last 5-6 years, I think now is a pretty good time for purchase.

Actually it is most definitely a sellers market in the Chicago area right now.  Last spring we bought a home in the West suburbs of Chicago.  Since that time, in one year, builders are building again and rates have jumped exponentially.  My father is a home builder and had brand new homes sitting for those 5-6 years, which finally sold last fall.  He broke ground on 2 new homes right next to the others that were sitting before the winter and has sold both of them prior to the frames even being completed. 

[GGGG]

I am not saying you should or shouldn't buy, but some things to consider:

• I live in Chicago and it has turned into a seller's market, especially areas like Lincoln Park
• You are comparing an apartment to a house.  Not a fair comparison.  A condo to an apartment would be closer.  As a house will be a lot more of your time than an apartment.   If you are talking a condo you need to add in the monthly HOA to your numbers.  If you are talking a house you will spend more of your time on it versus going to your landlord
• If you rent an apartment that is $60-$70k you could invest right now (instead of a down payment).  That $60-$70k COULD do better than real estate prices if it is invested correctly
• You didn't include the cost of interest, even after the tax advantages, in your numbers.  Even with a 20% down payment you could pay north of $30,000 in interest even after the tax advantages
• You didn't include real estate taxes and the increased amount of insurance, additional utilities, selling closing costs which INCLUDE commisions

Bottom line is your number is not $96,000.  The math could be much closer to something like this as an example:

Assume 4 years:

Monthly HOA:  $200 (or improvements if a house)
Yearly Real Estate Taxes: $4,000
Yearly Additional Insurance: $1,000
Yearly loss of return of $70,000 down payment @6%= $4,200 (conservative not compounding either)
Yearly Additional utilities usually included in rent:  $1,800
Closing cost sale at 5% after fees and commissions:  (350K @ 5%) = $17,500
Total interest paid after four years: $30,000

INCLUDING for tax advantages, after four years that is $96,000 less $70,000 which is $26,000.  So now your prices only have to drop $26,000 versus a $350,000 place (7.4%) and you are even.

And as someone who has had to move and sell a house a few times in his life, don't underestimate the potential cost of maintaining two households after a relocation.  For instance, what if it takes you 3 to 4 months to sell your house?  You are out more interest, more tax payments and more utilities.

The flexibility and freedom of relocation that renting gives you is something you should seriously consider.  

[MDMU04]

If you're looking in Lincoln Park proper, you'll be buying a condo for 300-350k and not a house. So like the others said, you'll need to consider HOA assessments. I saw an estimate of $200 per month. You would be doing quite well if you found one that low, I would probably budget for at least three times that amount.  Also make sure to read the HOA bylaws. Some places can charge very large ($10k +) special assessments for major building maintenance.

Parking will also be something to keep in mind. Street parking will be very difficult to find, and deeded parking can be another $10k or more depending on the building.

[Stronghold]

What you are missing young man is putting a wedding ring on that woman's left hand. There should be no discussion of cohabitation until you have consecrated your relationship.

Not even a discussion eh?

[Chicos' Buzz Scandal Countdown]

I am absolutely referring to a condo, btw... "House" was a misstatement.

[Chicos' Buzz Scandal Countdown]

What you are missing young man is putting a wedding ring on that woman's left hand. There should be no discussion of cohabitation until you have consecrated your relationship.

k

[Tortuga94]

I know very little about the real estate market in Chicago or the surrounding area, but here's my take.

4 years is a very short time frame when talking about a large real estate purchase. Real estate can fluctuate in value quite dramatically and if you factor in property taxes, home improvements, insurance(home, additional life, umbrella liability), etc., the costs really do add up.  My suggestion would be to rent if you're not willing to take a chance on losing money on this deal. There are a lot of expenses/responsibilities that come with home ownership and don't believe 4 years is a long enough time frame to make sure you can recoup those costs.

Also, if you're relying on the property tax and interest deductions, while those expenses are usually deductible, keep in mind that if you are in the small minority of people subject to AMT, you may not be able to deduct those. Consult your tax adviser. Good Luck.

[Silkk the Shaka]

This might help:

http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

[Wally Schroeder]

Before jumping into buying I'd recommend renting for a year. You might discover you hate Lincoln Park, and would prefer to be in Logan Square or Bucktown. Or, you might prioritize being further East in Lincoln Park/Lakeview for easy express bus/lake access. Maybe you won't be able to get out of Chicago fast enough, or you and the fiancé may fall in love with the city. No matter your current impression, there's no way to simulate day-to-day living.

The market has definitely shifted to the seller side. I bought a condo in Lakeview two years ago and my neighbor is trying to sell his place for 20% more than I paid. My assessments (10 unit building, no doorman or pool/fitness center that will drive up costs) are under $300, there's healthy reserves, and there's never been a special assessment. Those in high rises are experiencing the exact opposite. We're braced for a tax hike, and Lakeview is fortunately cheaper than LP. What hasn't been mentioned is these costs will be passed to renters. I rented a jr. 1 BR a block from Wellington/Sheridan guy under $800 (no parking) before my current place and it's already increased to over $1k with plenty of demand.

MarquetteDano laid out an excellent cost analysis, so I won't go into details. It comes down to your priorities. There's risk both ways. You can find a very nice 2 BR/2BA for $300-350k in Lakeview with reasonable assessments, but those costs + taxes creep up the further south into LP/Old Town you go. Depending on your bylaws, you can also rent out your place when you decide to move in 5 years. On the flip side, you have less cost control year-to-year renting, but when your dishwasher breaks, it won't be on you to replace. You can also pick up and go without the strings of a mortgage.

[mikekinsellaMVP]

Wally's suggestion is a good one.  I don't know how much looking around you've done, but a year to fully explore the city before committing is smart.  When I first moved down from Milwaukee, I lived in Park Ridge because of the proximity to my job near O'Hare.  While I initially rued my decision not to live in the city, I like that it gave me some neutrality in my first year.  I had friends to visit in Lakeview, Wicker Park, Lincoln Square, Bridgeport, Pilsen, etc.  It really gave me a chance to look around and figure out exactly what I wanted.

[Benny B]

What am I missing?

What you're missing is that anytime someone asks the "rent vs. buy" question as you did, you're basically soliciting the same pro/con arguments to both that have been regurgitated for years.  So put that aside, as I'm sure you already have considered things like mobility, true cost of ownership, opportunity costs, joint and several liability, etc.

#1: Although there's been some volatility over the past 12-18 mos., interest rates are still at historical lows... 30y fixed rates are hovering around 4.25% right now, down from 4.50% at the beginning of 2014, but up about 75 bps from a year ago.  A 100-bps change in interest rates is roughly equivalent to 11% of "buying power" for a $300k pad, i.e. a $300k home at 4.25% is the same monthly payment as a $267k home at 5.25%.

So most unbiased third-parties will say if you're planning on buying within the next 3-5 years, the downside of interest rates rising far outweighs the upside of interest rates falling or staying the same.  But if home prices make a corresponding move with interest rates, it might be a wash anyhow.  Though, as unpredictable as interest rates are, home prices are even more unpredictable.  As the boomers start to retire and downsize, relocate, and/or move into senior housing, home values are going to get even more unpredictable.

Moral of story -- Don't try to time the market.  The time to buy is when when you're content with the price your paying, the interest rate you locked for the home in the location you want.  But even if you view it as a "starter" home, make sure it's something you can be comfortable for five years beyond however long you're planning to be there so you can ride out any potential storms you might encounter in the housing market when it's time to sell.

#2: The above notwithstanding, Lincoln Park has been and continues to be a very strong market.  I know of three people personally who have sold places there within 30 days of listing at or darn close to their asking price... none of them took a hit, despite two of these three being sold in the depths of the housing crisis (2008-2009).  As long as you don't overpay going in, you'll be at exponentially less risk of losing value buying in Lincoln Park than you would most places in the Chicago metro, or for that matter, in the entire U.S.

My two ludicrously oversimplified cents (take for what it's worth) --- if you're looking at a condo or flat in Lincoln Park at a fair price, buy.  If you're looking anywhere else, buy only if you comfortable with the idea of being there for 5-7 years, minimum; otherwise, rent.

[Chicos' Buzz Scandal Countdown]

I know very little about the real estate market in Chicago or the surrounding area, but here's my take.

4 years is a very short time frame when talking about a large real estate purchase. Real estate can fluctuate in value quite dramatically and if you factor in property taxes, home improvements, insurance(home, additional life, umbrella liability), etc., the costs really do add up.  My suggestion would be to rent if you're not willing to take a chance on losing money on this deal. There are a lot of expenses/responsibilities that come with home ownership and don't believe 4 years is a long enough time frame to make sure you can recoup those costs.

Also, if you're relying on the property tax and interest deductions, while those expenses are usually deductible, keep in mind that if you are in the small minority of people subject to AMT, you may not be able to deduct those. Consult your tax adviser. Good Luck.

Thanks - I guess my logic is renting = losing 100% of the 2k automatically... so 96k guaranteed loss over 4 years.

With this as a benchmark I'd be coming out ahead even if I ended up losing just 80k over 4 years.

[MU82]

Thanks - I guess my logic is renting = losing 100% of the 2k automatically... so 96k guaranteed loss over 4 years.

With this as a benchmark I'd be coming out ahead even if I ended up losing just 80k over 4 years.

A lot depends on your definition of "loss."

It sounds like you want to buy. If so, Benny B makes lots of great points.

[ZiggysFryBoy]

watch out for shoddy work masked by shiny finishes.  a lot of problems with condos in Chicago.  and the builders have all disappeared, good luck finding them to fix things, if they would even be on the hook still (10 year statute of repost on Real Property in IL).

[MU82]

watch out for shoddy work masked by shiny finishes.  a lot of problems with condos in Chicago.  and the builders have all disappeared, good luck finding them to fix things, if they would even be on the hook still (10 year statute of repost on Real Property in IL).

THIS IS A GREAT POINT!!!!

We bought an extremely flashy condo in the Belmont/Ashland area in 2004. All the whistles and bells -- Viking, Subzero, Bosch, granite, stainless,  heated floors in baths, Brazilian hardwood floors, luxury finishes, etc. It had an amazing roof-top deck with a view of the entire city. We were swept away on our very first look. This was when real estate prices were still going up, up and away.

When our friends visited, they were envious of our view and our fancy digs. We burst with pride.

About 3 months later, the first big rainstorm came and our windows -- high-end Andersens -- were leaking like crazy. It was as if somebody had sprayed the inside of our unit with a firehose. Then the roof started leaking. Alarmed, we called for a board meeting -- we were the treasurers of our four-unit building -- and decided to bring in multiple masonry experts to give their opinions on our situation.

The building had a lovely brick front but the rest of it was built with cinder blocks. We came to learn that this has become increasingly popular -- much less expensive than brick for developers. (Sure enough, after we learned about this, we began noticing dozens upon dozens upon dozens of these.) Both of the masonry experts said it appeared the building had been put up very hastily and without great care. The windows were fine but they were installed poorly. The roof was not put on in a quality way. Both experts, on separate visits, pointed out the numerous small cracks that had developed in cinder blocks up and down the sides of the building. By the way, the building was only a little over 2 years old at the time.

We got some estimates to do the fixes and they were tens of thousands of dollars. We confronted the developer, but he was a lawyer and was not the least bit worried that we would sue him. We made inquiries with our alderman and the bureaucrats in charge of codes but seemed to have little recourse because we could not prove the developer knowingly sold us crap.

We paid to get all the windows caulked and to have some repairs done to the roof. We put off doing anything about the small cracks on the exterior walls. For awhile, all seemed well. About a year later, however, many of the same problems resurfaced. One especially bad storm resulted in all four units leaking.

At that moment, I decided I would sell no matter how much money we'd lose because I had no confidence the building would stand the test of time. We listed it in October 2006, only 2 years after we bought it. It took us 6 months to sell because the market was starting to go to crap. Amazingly, we got almost our full asking price. We disclosed the past problems and presented paperwork to show what we had done to address the problems because we did not want to be sued for hiding anything. The buyers, like us, were seduced by the beautiful finishes and the view.

The day we closed, I was so relieved that I cried.

About 2 years after buying it from us, the new owners put it on the market. They must have had some problems too. It took them over a year to sell it and they ended up getting $150,000 less than what they paid us for it.

We made an $18K "profit" on the purchase, but in reality we lost tens of thousands of dollars once closing fees, realtor fees, repairs, an HOA assessment, etc. were factored in.

I vowed that if we ever bought another brick building in Chicago, we would bring in a masonry expert as well as an inspector. We ended up renting for the rest of our time there, however, before moving to another state.

We also learned a lot about ourselves and what was really important. I won't bore anybody with the details, but we no longer are as material as we were back then. We don't need the best just to show off to friends. We live much simpler, happy lives. As stressful as that condo was, I honestly believe it helped make us better people.

Anyway, sorry for the length of this, but I thought this cautionary tale might be of some use to the OP or to anybody thinking about buying a condo in Chicago (or anywhere else, for that matter).

[Canned Goods n Ammo]

We also learned a lot about ourselves and what was really important. I won't bore anybody with the details, but we no longer are as material as we were back then. We don't need the best just to show off to friends. We live much simpler, happy lives. As stressful as that condo was, I honestly believe it helped make us better people.

This is an important point that should be considered when looking at real estate.

It's not sexy to brag to your friends about your foundation that doesn't leak, but a dry basement is a lot more fun than a sub zero fridge. Trust me.

Most of us envision our "perfect day" when we look at real estate (we'll have our family and friends over, we'll entertain, everybody will be impressed by us, we have a guest room!, etc.). We're all attracted to shiny new appliances, granite, fancy sounding woodwork, glass tile, steam showers, etc.

The truth is, we should be buying our homes for our "average day". How do you actually live? What are your actual hobbies? What are your day to day needs?

A good, solid, practical house can always be redecorated and remodeled to fit your lifestyle and style.

A poorly built condo, mcmansion, or flipped home is going to look great, but you'll be fighting with the building from day 1. You're fighting physics and mother nature, and you'll lose.