Renting v Buying?

[MU82]

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.

Fantastic, true comment.

[mugrad2006]

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?

I'll add look at your income. If you make a significant salary, either filing single or jointly, you might lose the mortgage interest tax deduction to an extent. Don't remember the exact amount but wife and I didn't look ahead of time assuming we'd deduct the mortgage interest payment but I guess those MU degrees were too lucrative to our employers.

That said, even with our Lakeview neighborhood HOAs we're ahead by my math.

[Benny B]

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?

The answer to all three of your questions explains why I have a small brewery in my basement and old, shag carpeting on the 2nd floor.

[Spotcheck Billy]

We followed the adage of buying the worst house in the neighborhood and slowly fix it up when you can. Of course that only applies if you plan to stay in that house long term as we are.

[ZiggysFryBoy]

We followed the adage of buying the worst house in the neighborhood and slowly fix it up when you can. Of course that only applies if you plan to stay in that house long term as we are.

A Lannister always pays his debts!

your old man couldn't sh!t some gold for you?

[MU82]

We followed the adage of buying the worst house in the neighborhood and slowly fix it up when you can. Of course that only applies if you plan to stay in that house long term as we are.

When we bought our first Chicago house, we did exactly this. We moved from Minny and with the help of some Chi friends, we identified the neighborhood we wanted to live in. (A cute neighborhood mostly of small bungaloes in West Lakeview called "St. Ben's." It has one of the best K-8 schools in the entire city.) When we were looking, there were exactly 2 houses available in the neighborhood. One was too expensive. The other was right on the border of too expensive and it needed work. We borrowed money from my parents and my brother (as well as the bank, obviously), said a prayer and bought it at list price because there were other couples looking at it the day we did.

It had 3 small bedrooms and only 1 full bath -- very small for a family with two kids. The backyard was so small that we decided to stop pretending it was a "yard." We paved almost the whole thing and put a basketball court up with the nicest hoop around; kids from all over the neighborhood came to play on it.

We got it for $229,500 in 1994. Ten years later, we sold it for $585,000. Over the years, we put about 100k into it.

Of course, we were fortunate to buy right near the start of probably the hottest housing-market rise in history. I'd love to say we were brilliant, but we were lucky as much as anything.

[Spotcheck Billy]

nm

[Benny B]

quote author=Tyrion link=topic=43982.msg623540#msg623540 date=1398879989]
We followed the adage of buying the worst house in the neighborhood and slowly fix it up when you can. Of course that only applies if you plan to stay in that house long term as we are.
[/quote]

When _____________ buys a house, it automatically becomes the worst house in the neighborhood, no matter its condition.



Maybe I should change my avatar to Gene Rayburn.

[Marquette Gyros]

I'll add look at your income. If you make a significant salary, either filing single or jointly, you might lose the mortgage interest tax deduction to an extent. Don't remember the exact amount but wife and I didn't look ahead of time assuming we'd deduct the mortgage interest payment but I guess those MU degrees were too lucrative to our employers.

That said, even with our Lakeview neighborhood HOAs we're ahead by my math.

You're free & clear 'til you make more than $250k (by yourself) or 300k (w/ spouse). 

[Benny B]

You're free & clear 'til you make more than $250k (by yourself) or 300k (w/ spouse). 

For now.  Unfortunately, I have feeling that it's going to erode until it reaches the student loan interest deduct threshold.  Hello add'l marriage tax.


I'll amend my previous response to the OP's original question (what is he missing)?  Don't get married.  At least have the nice church wedding, but don't sign the marriage license and just have an attorney put together a co-habitation contract or something.

[MUDPT]

Rent, rent, rent.  My wife and I rented for 5 years in Lincoln Park, saved our money and put 20% down on our house in Madison.  Rent/ taxes/ insurance is 75% of our rent in Chicago.  By the way, are there 2 bedroom condos for sale for $350,000 in LP?  That's news to me.

[Marquette Gyros]

For now.  Unfortunately, I have feeling that it's going to erode until it reaches the student loan interest deduct threshold.  Hello add'l marriage tax.


I'll amend my previous response to the OP's original question (what is he missing)?  Don't get married.  At least have the nice church wedding, but don't sign the marriage license and just have an attorney put together a co-habitation contract or something.

Agree, unfortunately.  I naively thought that getting married would reduce our tax base, but sure enough, the gov't gets more of our $$$ now. Pretty good advice above for lots of reasons.

[Marquette Gyros]

By the way, are there 2 bedroom condos for sale for $350,000 in LP?  That's news to me.

Yep. Western LP for low-HOA 4-flats, closer to the lake for high-HOA units in high rises.

[LloydMooresLegs]

From today's WSJ, the lead article in the Weekend Investor subsection of Section B:

WEEKEND INVESTOR
The New Math of Renting vs. Buying
Here's how to figure out which strategy makes the most financial sense.

By ANNAMARIA ANDRIOTIS
May 2, 2014 6:17 p.m. ET
Buying a home has long been part of the American dream. But rising prices have made renting less expensive in many places.

How They Rank
See the full rankings for 54 metro areas, and how Deutsche Bank did the math, on Total Return.

People often aspire to own a home for reasons that have little to do with money, and rental options are limited in some communities. Yet owning property can limit your flexibility to move when you want and ties up a lot of your money.

View Graphics
 
Scott Anderson
The median sales price of existing single-family homes rose 11.4% in 2013 from the previous year—the highest yearly increase since 2005, according to the National Association of Realtors. Prices in many places, including Los Angeles, Baltimore and Portland, Ore., rose even more last year.

The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. DBK.XE -0.49%  That is up from 15 large metropolitan areas a year earlier.

The bank calculates the costs in 54 markets based on average local rents and median home-sale prices, which it uses to estimate monthly mortgage payments for a hypothetical buyer in the 25% federal income-tax bracket.

Renting had been less expensive than buying on average across all the areas Deutsche Bank tracks since at least the early 1990s. But that changed during the financial crisis, as home prices plummeted and interest rates on mortgages dropped. The current rally in home prices appears to be pushing the housing market back toward the historical norm.

Where Renters Made Gains
Here are the metro areas where renting made the biggest gains against buying in the fourth quarter of last year compared with a year earlier.

View Slideshow
 
A renter in Orlando paid $1.24 a month for every $1 a buyer spent last year, down from $1.44 in 2012. Corbis
The five markets where renting recently became cheaper than buying include some popular cities and suburbs where home prices are climbing fastest: Sacramento, Calif.; Phoenix; San Bernardino and Riverside, Calif.; Austin, Texas; and Northern Virginia.

Buying is still cheaper in 34 metropolitan areas Deutsche Bank examined, including Cleveland, Chicago and Atlanta, though prices rose last year in those areas, as well.

Renting has become more appealing financially than it was at the end of 2012 in places such as St. Louis; Orlando, Fla.; and Minneapolis, though buyers still pay much less than renters in those areas.

The buying advantage was slight in some places. Miami, San Antonio and Las Vegas are among the hot markets where renters appeared to be on the verge of being better off than buyers at year-end, according to the bank's figures.

Buyers, of course, can build up equity as they pay down a mortgage, which can compensate for higher monthly costs.

Here is what you need to know to help figure out the most cost-effective way to keep a roof over your head. The first step is to understand the arguments in favor of buying and renting.

The Case for Buying
Many Americans see buying a home as an essential step in a successful life, and owning one can bring significant financial benefits.

The most obvious upside is that a home can significantly increase in value. The median sales price of existing single-family homes rose 81% from 1993 through 2013, according to the NAR.

The potential payoff can loom large in a buyer's mind when home prices are going up rapidly, as they have recently. "We've already seen six to seven years of normal appreciation in the last 12 months" in many markets, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Many homeowners also can deduct mortgage interest from their income-tax bills along the way.

TK
In addition, homeowners can tap into the equity in their homes for big-ticket expenses, such as college tuition, at interest rates that can be lower than other financing options—though that can backfire by saddling homeowners with debt they can't easily repay.

Homeowners also don't have to worry about a spike in rents. Jacquelyn Bilton, who is 34 years old, bought a three-bedroom home with a pool in Margate, Fla., in February for $200,000, after her landlord raised her rent 28% last year. She says her monthly housing costs are now about $300 lower.

"I couldn't afford to be throwing money down the drain in rent when I could purchase a home," she says.

As they age, homeowners can enjoy another benefit. If they pay off their mortgages around the time they retire, their housing costs can drop significantly just when they may want extra cash for travel, medical expenses and the like, says Chris Mayer, research director at the Paul Milstein Center for Real Estate at Columbia University.

To be sure, the dream also can turn into a financial nightmare. The collapse of the housing market starting in 2008, which triggered millions of foreclosures, is a vivid recent example of what can go wrong.

Still, owning a home can be well worth it for personal and psychological reasons that go beyond financial calculations.

The Case for Renting
Given the wide array of potential benefits, homeowners are sometimes surprised to learn that buying isn't always the smartest financial option.

To begin with, the monthly cost of renting can be lower, even for a home of similar size and quality in the same community.

Homeowners are sometimes surprised to learn that buying isn't always the smartest financial option. Bloomberg
Renters, for example, don't pay property taxes, homeowner's insurance and, in most cases, maintenance costs. These expenses can cost homeowners about 3% of the price of their home annually, experts say.

While those costs can be folded into monthly rent, apartment renters often pay a smaller share as landlords spread the costs among many tenants, says Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University. If a window breaks or the toilet plugs up, your landlord—not you—pays for the repairs.

Renters don't end up with a valuable asset, as buyers do when they pay off a mortgage. But renters might be able to make more money by investing the monthly savings, as well as the cash they would otherwise use for a down payment, he says.

The value of the average single-family home increased by 3.6% a year in the three decades through 2013, compounded annually, according to mortgage giant Freddie Mac. By contrast, the compound annual return on the S&P 500 over that period was 11.1%, according to Chicago-based investment-research firm Morningstar.

After moving to New York two years ago, Hunter Kearney, 27, looked into buying a condominium worth at least $2 million. But Mr. Kearney, an executive at a firm that sells graphite, concluded that renting a similar apartment was significantly less expensive.

"Your monthly costs end up being lower," says Mr. Kearney, who says he saves about $2,000 a month over the cost of buying. He is investing some of the savings in the stock market.

Renters often have greater flexibility to move to a different part of the country, which can be important in a weak job market. They may feel freer to look for work in another city, and they don't have to wait to sell their home if the right opportunity opens up.

Housing prices don't need to decline as severely as they did during the financial crisis to cost homeowners significant sums, if they need to sell during a downturn. Modest declines in home prices are common.

Even people who want to own a home at some point can benefit from renting for a while to save up for a larger down payment. If the available inventory is thin, they can rent while they wait for a wider variety of homes to be listed for sale.

Handling a Hot Market
To calculate whether buying or renting makes more sense financially, you need to have a sense of your monthly costs in each case, including rent, mortgage payments, taxes, insurance and other related expenses that may apply to each option—as well as whether you would be more likely to spend or invest any savings from renting.

The verdict could differ considerably within a city, suburb or town, based on the location and the style and size of the homes you are exploring.

The Deutsche Bank data reflect an attempt to do that math across metropolitan areas, and essentially function as a general guide to each market.

Would-be buyers should proceed carefully. First, they should try to get a sense of how hot the local real-estate market is and whether buyers generally still have the upper hand, which is often the case far from the coasts and outside large cities.

If you are in a more-competitive market, be alert to the risk that you could end up in a bidding war that could drive up the purchase price. Being patient could pay off if prices cool down. In fact, slight corrections already have occurred in some markets.

In San Francisco's East Bay area, for example, asking prices of some new homes declined 1% to 5% during the second half of last year, after builders raised prices by 5% to 18% in the prior quarter, according to Metrostudy, a housing research and consulting firm based in Palm Beach Gardens, Fla.

Gene and Erin Lash plan to sell their home in Danville, Calif., and are prepared to spend $1 million to $2 million on a larger house. But the couple has faced as many as 30 competing offers on each of the five homes they bid on and lost out every time, says Mr. Lash, a 48-year-old forensic accountant.

Now, the Lashes are also looking into renting a single-family home or an apartment as a short-term alternative to buying. "Everything is on the table," Mr. Lash says.

Even in a hot market, the math can be more advantageous for buyers who plan to stay put for a while, typically at least five to seven years. That should be enough time for market corrections to pass, says Landon Nash, a real-estate agent in San Francisco with national brokerage Redfin.

Mr. Nash says he is telling would-be buyers in his area who plan to sell in fewer than five years that they run significant risk of selling at a loss. "We're at the top of the market," he says. "They might be better off as renters."