Is Now a Good Time to Rent?
I asked, as I sometimes do, what personal finance question my friends and Twitter followers had for me. It was a slow day on the internet and the responses flooded in.
My friend Neil asked, “what do you think about real estate?” A broad question, indeed, and I got him to clarify. “You know… should I buy a house? Why not just rent?”
Why not indeed.
The Dream of Home Ownership
I too bit off and gulped down the dream of home ownership when just a small lass. When I graduated from college, I moved to a Southern U.S. city — Charlotte, North Carolina — and like any young professional often in the company of older, established professionals — saw immediately that they all owned houses. And that this was very good.
What they had, I wanted: the houses with the staircases and the pretty backyard decks and the grand old trees in the back and the guest bathrooms with bowls of little colored soaps. I wanted a kitchen, with wide countertops and an arching clamp-hose faucet over the deep sinks and big drawers for flour and pot lids and recycling bins. And art on the walls, and a king-sized bed, and a walk-in closet, and a master bath.
My dream was only made more intense while shopping for condos in New York City, then in Reston, Virginia, with my 20s-era boyfriend. When he went to sign his first title, I went too, and we went out to lunch afterward at a restaurant on 54th street; we spent $112 and when I ate the tiny plate of tiny after-lunch sweets (a little cheesecake, a little truffle, a little gelee), I felt I’d arrived.
Years later, after the boyfriend, I became pregnant and my now-husband and I shopped for homes. My stories of those searches are intense and full of longing and stress; but by my fourth month of pregnancy I was living in house all my own. I vowed to never move.
Tip: Compare mortgage rates from multiple lenders for new home loans and mortgage refinance loans.
Other People’s Dreams
I am — I was — the classic case for home ownership. I live in a small city and, when I bought the house, prices were reasonable; my mortgage payment is now less than many pay for renting an apartment. I love working on the yard and painting walls and I even tiled my bathroom myself (with lots of structural help from my father and husband). My husband is handy, and can run wiring and solder plumbing and he built a whole room in the basement. We’re the home ownership success story (though admittedly we have a lot more work to do, and no walk-in closet, no master bath).
But for many people, home ownership should remain the stuff of other people’s dreams.
I think my friend Neil is a good example. His ex-wife longed to buy a home in Los Angeles, where they had made a home after Neil’s upbringing in New York City. The situation was probably even more intense for her than for me in Charlotte; their friends and colleagues owned expansive ranch-style show-homes and sweet artsy bungalows, in neighborhoods where the price-per-square foot probably neared four digits at the peak of the market. The mortgage on those homes would require all of one middle-class salary.
Even for the more economic choices, prices were high and there was no clear benefit to buying over renting; in fact, most mortgages would be more than the cost to rent a nice (and low-maintenance) apartment.
Neil wasn’t good with a hammer or a chop saw, nor did his wife have any desire to keep a fine vegetable garden. There was no dad around to rip out old bathroom floors or teach Neil to solder copper pipes. Neil had no dreams of living in his home forever with his growing family; to date, he has no children and he’s now divorced; he’s not sure if he’ll stay in LA for the rest of the year, let alone the decade. For him, home ownership is someone else’s dream.
Should I Buy a Home?
For me, Neil’s question was easy. “No,” I said finally. “I don’t think you should buy a home.”
“But isn’t that the goal?” he asked me. “Isn’t that what you’re supposed to do?”
Well, maybe. But I’ve found my own definition of “getting rich slowly” is often made up of doing few things that one is “supposed” to do; for me, living a double income, office job lifestyle is one such “supposed to” I’ve discarded. For Neil, I prescribed letting go of that “supposed to” of buying a home.
How to Know When You’re Neil
Are you Neil? That is to say, should you too avoid adopting the dream of home ownership? Here are a few signs you may be Neil:
You are still a transient
Of course, we know I don’t mean “homeless person.” I believe many of us today graduate college (or high school, if college wasn’t the path for you) as transients, expecting to live in one place for a few years before trying out another, and another, and another, until one feels like home (or until you fall in love with someone who’s rooted to a place, giving you a graft and rooting you, too). If you’re not sure yet if this place is going to be your home for more than the next few years, home ownership is not for you. With closing costs and the uncertainties of the real estate market, it’s very difficult to come out of a two-year home ownership transaction without losing money as compared to renting.
You have no desire to engage in home and garden upkeep
While some such people might hire gardeners and contractors to fill in the holes in their handy skills and passions, most of those who don’t care to pick weeds or fix fences or mow lawns or plant apple trees are better off with an apartment. Purchasing a condo might be an option, if you don’t say “yes” to any of the other items in the “are you Neil” list.
The market in your favorite neighborhood doesn’t make sense
If the cost of a monthly payment on a mortgage would be greatly higher than the price of a two-bedroom apartment or other rental suitable for your family’s needs — say, more than 25 or 30% higher — it’s probably not a good time to buy. While indeed mortgage interest deductions and home buyer credits and the time value of money might be squished around to make the comparative cost similar, do remember that life is uncertain and markets fluctuate and maybe you should wait a bit — or look around for a more sensible neighborhood — before buying something.
You’re not sure about your career or your job
Maybe you’re considering going back to school to become a sommelier. Maybe you’re pretty sure your boss wants to retire and sell the company. Maybe you just don’t love your job and you’re looking around for something new. If you’re not fairly confident your next few years won’t include a significant change in income, it’s probably not a good time to engage with the homeownership dream.
Your relationship with your partner is rocky
I’ve been watching several of my friends deal with the tough decision over what to do with the family home when a relationship is over. In one case that worked out for the best — the family made a nice profit from the sale. But that was a rarity. If you’re married, you might end up having to sell and take a significant loss, even if you’d rather stay in the house solo; if you’re not married, things could be even more wonky. One woman I know lost her grandmother’s home after a pre-marriage breakup (with someone who obviously turned out to be enough of a jerk to keep her grandmother’s home, though that analysis is one-sided and second-hand, so take it with salt). Be honest with yourself, and know that, much like puppies and babies, houses do not fix broken relationships.
You would have to cash in retirement or emergency savings to buy the house
A home-buying fund should be separate from those savings for emergencies and retirement. You’ll have more emergencies, in all likelihood, with a home than without. And you know how we feel about retirement savings. If your dream is that intense, then you can use your intensity to fuel your frugality while you save up for the down payment.
It also makes sense to run the numbers through a rent vs. buy calculator to see if the results would influence your decision one way or another. Have you struggled with the decision to rent or buy? Where did you come out on the Neil/not Neil spectrum?
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There are 121 comments to "Is Now a Good Time to Rent?".
If you aren’t financially and mentally prepared for home ownership I totally agree that it isn’t a good idea to buy. There are even arguments that buying a home isn’t a good investment either but that is for a topic for its own post. Overall I think if you are all settled down and think everything in life is stable and going well AND you actually WANT to own a home and deal with all of the chores that come with home ownership AND can find something affordable then you should buy. That is a lot of ANDs though…
The important issues are life, relationship and lifestyle issues. Well put. And a good counterpoint to those who mindlessly advocate buying a house.
Financially, the #1 consideration is price, and in that the economic cycle is the biggest consideration. House prices are cyclical, meaning they go up and down. Buying when prices are high can be ruinous. Buying in a recession is good from many points of view.
One the most important benefits of buying at a good price is you can sell when you want to with no fear getting in more financial trouble. If you move, divorce, or otherwise change your living needs, the last thing you need is to be underwater and to add that stress to the situation.
I don’t like gardening – I did my lifetime quota of gardening as a child as forced indentured labor (at least that’s how I saw it). My wife, though, wanted a classic house, so that’s what we got. I dig the occasional hole for a new plant, which allows me to take a bow when visitors compliment us on the garden, as they inevitably do! 🙂
Good post! I’ve been getting a lot of pressure from friends and family to get into real estate, but I feel it doesn’t make sense for me right now. (I’m going to send them this post!) One of the biggest arguments against it is the market. Americans at least know their real estate bubble has burst. I’m waiting to see what happens where I live.
It should be noted that owning a home doesn’t necessarily mean a house. I know a few people who own condos because they don’t have to deal with outdoor maintenance and big expenses (like the roof) are shared.
I agree – home ownership isn’t for everyone and in some markets, it’s just like throwing money away. I do want to be a homeowner, but I am also biding my time.
I like this article. I’ve read a few blogs that seem to be shouting about how buying a house is foolish or runs counter to the “new” American Dream.
I think the buyers remorse that people sometimes have are from those very points you’ve made above — things you should consider BEFORE you buy a home.
Also, I think a lot of people buy too much house and overextend themselves. That creates stress on a month-in/month-out basis.
I have a friend that bought a home after he was married. He didn’t enjoy it and ran all the numbers and reasons why renting was better. He sold his house, and started renting an apt. A few years later, he bought a small condo in a downtown bldg. He finally realized that his issues were with home upkeep, a yard, etc. He took his time the second time and decided he did want to own, but he made sure he found what suited him best.
Great post.
In my current relationship with my soon-to-be wife, we’re struggling with this same issue. Really, it all boils down to two opposing viewpoints:
– We want to have the space and security a house provides for growing families. Home ownership, as mentioned in the article, is the apex of the Great American Dream, and I guess we’re suckers for a good dream. Having a home to point at and say “that’s ours” makes me feel all warm and fuzzy. And renting feels like stuffing money down the drain and turning on the disposal. It pains us to write checks that “disappear” that could be an investment into a home.
– I’m not handy at all. I have no desire to spend time fixing up a house, even if it’s mine. Renting is clean and easy. I write the check and they fix the problems. Also, homes are expensive. We may have to sacrifice money for our child’s education in lieu of owning that big backyard or the nice kitchen, and I don’t know if that’s worth it.
If anyone can weigh in on this, I would be most appreciative. For those of you with children: do you currently rent? Are you satisfied? What would you all recommend? Thanks!
I don’t think rent is “money going down the drain”. Rent covers expenses that homeowners have too such as insurance, property taxes, maintenance and some utilities. It’s not like your entire rent payment is going towards someone else’s mortgage. (A good part of it is, of course!)
On a month-to-month basis, it may cost the same to rent as to buy but then there are renovations, repairs, maintenance, etc. to consider. I know people who own modest homes outright who pay as much to carry the home as I do in rent. I haven’t purchased a home yet, but I have been enjoying saving and investing the difference 🙂
I think it really boils down to what you’re willing to pay — both in terms of time and cash — for a certain lifestyle.
Couldn’t agree more. People often think of the mortgage payment when comparing to renting and forget the other expenses.
Before buying our house we paid about $1200 monthly in rent for a 3 bedroom, 2 bathroom apartment in New Jersey. Our mortgage now is $850 for a bit larger house (adding a big family room and a big finished basement to what we had in the apartment). Since we are paying more, we’ll be mortgage-free in a few years, but will still have left $600 monthly for taxes (and that’s after we appealed and won a reduction) and $250 for insurance (most of it for flood insurance which is incredibly expensive). So $850 down every month without even including maintenance. We’ve renovated this house ourselves top to bottom and because of this recent work maintenance now is low, but in a few years we’ll probably end up spending a few thousands a year once things start wearing down.
Don’t get me wrong, we like being home owners. We are both handy, we have pets which is always a hassle when you rent, and we do like the backyard advantage for our kids. But cheaper than rent it’s certainly not, and if you think of rent as “going down the drain” these expenses are going the same way.
Exactly! Owning a house doesn’t mean free housing – it costs me $10,000 a year in insurance, taxes and maintenance on a home that is paid for. But compared to how much it would cost me to rent a place, it’s relatively cheap.
@ Matt: My husband and I have one kiddo and currently rent. I want a home mainly because of our daughter. We rent a townhome, and there’s no place for her to play outdoors. For her to do so, we have to make the drive to nearby parks (time consuming, gas, no privacy, etc.). I do have a dream of watching her play in the backyard while I do dishes or something in the kitchen and can just peer at her through the window. However, by the time this dream is realized, she will probably be “over” playing in a backyard.
The biggest dissatisfaction, though, is that keeping your kiddo in the right schools (i.e., not having to make her change schools with every new place we rent) is very difficult. The stability of a house is something I would completely be ok with. My daughter has already had to switch elementary schools once–and she’s ONLY going to the second grade. I don’t want this to be a trend throughout her childhood … Thank goodness she’s MUCH more of a social butterfly than I was and can handle change better. That said, she really misses the friends she made at her old school and has no problem telling you her new school is not as nice.
It’s having a kid that makes me wish we *hadn’t* bought. We could rent a place with a yard (or even better, a small apartment building with a fenced play yard – there are a lot of them around here) and not spend so many hours doing yardwork on our own personal yard.
But when we bought we were young, energetic, had lots of free time, and had roomates who came with us into the house. An old house that needed lots of upkeep and repairs, and a large garden to take care of, seemed totally acheivable. I didn’t consider the time, money & energy costs of parenting as a competing pull to taking care of the house.
I agree that it is not money going down the drain. If you think it is bad to throw money at your landlord, just think about how bad it feels when you pay your mortgage and most of that money goes into the bank’s pocket. Example: my mortgage payment is about $525 a month. Out of that money only about $80 goes toward paying off my house! $325 goes to paying interest to the bank. At this rate, it will take a long time to have any real amount of equity in my home. The other thing is we also put money into fixing things in this 100+ y.o. home. We haven’t remodeled. Just normal stuff like repainting the interior and the exterior, did some landscaping, re-tiled the bathroom floor, put in new light fixtures, window treatments…small thinks like that which really add up. Also, our stove broke, and we had to buy a new one. I think you have to think about it carefully. We don’t have kids and we keep busy with the house (only 1000 square feet, and we don’t even have a lawn to mow). There is always something that has to be fixed or just kept up.
Ouch. You must have a thirty year at a high rate? Ours is $535, and on the last payment, $312 went to principal. We’re only a year into the payoff.
41 must be a 15 year loan. You can’t have 30 year and already be paying more principal than interest within a year.
If you aren’t handy and your wife isn’t either, that dream is going to cost you big in hired help.
The condo option exists, where hired help *is* more readily available for maintenance, but you really don’t “own” a condo – you own only the airspace inside the walls, under many contracts.
Owning a single-family home is a post-WWII phenomenon … there’s nothing all that “traditional” about it. I personally want to own a residence for retirement but primarily so that our shelter budget is fixed.
Again personally, there has been no time during my working life that owning a residence would have been a wise financial choice … I have moved across the country and changed jobs pretty much at will, and those options get a lot more complicated when you have a mortgage.
I have two small kids and rent. However, they’re both extremely active, so I’m looking to move into a small home with a large, fenced yard. The big question is whether to buy or to rent. My husband is all for buying. I’m not sure if we’ll be in the area long enough for it to be worthwhile financially. That said, I have a degree in horticulture, so I’m longing for a situation where I can plant a garden and landscape without asking a landlord for permission.
I don’t think renting or owning a home is “easy.”
With renting, you are constrained with what you can do, and if an issue arises, the landlord decides how to fix/address the issue. Maybe you would have wanted to handle the issue differently. Often you are limited with owning pets and what you can do with decor. Also, maybe you like living in a rental, and want to renew, but the landlord decides to sell the place. You don’t have that many responsibilities, but you also don’t have that many rights.
With owning, there are a ton of transaction costs associated with buying a house, maintaining a house, and selling a house.
Whether one option is cheap or expensive is entirely relative to what your situation is and what the relevant prices are. Some landlords take a loss because there isn’t enough demand for them to recoup all of the costs. Some landlords make a profit because demand is high (or their costs are low). Some homeowners are so far under water that it’s going to be decades before they can recover. Some homeowner’s have paid off their mortgage and have extremely small bills for taxes/insurance/upkeep etc.
I’d proceed cautiously with renting or owning. I’d try to investigate the alternatives and negotiate the best prices I could. With renting, I’d investigate negotiating down the rent, negotiating down the security deposit, and negotiating options to renew the lease at the same price (to counteract inflation). With owning, I’d investigate not just the price of the home, but also closing costs, taxes, maintenance costs, average appreciation rates, public services, transportation options, poplution changes, etc. In short, I’d take a hard look at all the documentation associated with any significant financial transaction (lease, mortgage, etc.) but also the big picture stuff.
My wife and I certainly met most of the criteria for homeownership, but our problem was that we didn’t buy a house in the right location. We can certainly afford our house, I’m gradually learning to become more handy, and my wife enjoys yardwork.
But the schools are terrible, and we are too far from my wife’s parents. We put too little down and are now stuck with no chance of selling our house for probably another few years (or whenever housing prices start to move back up). Ugh! Our house turned from an exciting purchase to a big mistake.
I’m a Neil and I’m not struggling with it! I love renting!
The main, chief, #1, don’t-need-another reason is that we’re still transient. My husband has been in our city for 5 years (I’ve been here four) and we’ll very likely leave in the next two years when we both get our PhDs. I thank my lucky stars that neither of us could have afforded a down payment in 2007. Unless we get very lucky, we’ll probably live in one or two more cities for 2-3 year postdoctoral positions before we finally get to our ideal lifetime city, San Diego. And then we’ll continue renting until we can save up a down payment and find a neighborhood we like – who knows how long that will take!
Home ownership just seems like a massive hassle to me. I like having a new apartment with no problems (but if I ever did I can pass them off to our leasing office), knowing we can move if the situation turns sour. I like that we only spent a few hundred dollars off craigslist to furnish two half apartments (now one whole). The prospect of furnishing an entire house is very intimidating!
The one and only friend I had who was prepared to buy a house when she started her PhD program (sure, 5-6 years is “long enough” to buy, I guess) ended up being asked to leave with her master’s. So now she’s stuck in this city because of the house, but without a terribly good reason for being here.
Great post! You outlined many good points. I wonder how these reasons would line up against a person planning on buying a house vs. building one. With new construction you get the opportunity to customize everything exactly the way you want it, but can end up splurging for upgrades you don’t need. Also, when building your own home, it’s likely you plan to stay put for a long time, so you usually don’t think that much about the future sale down the road, and how your particular design style might affect it.
Have people ever made changes to their house that they really want, even though it might not help the value of the house or make it more appealing to buyers in the future?
Jennifer,
I think that in many markets you can’t build a house for less than it’s resale value. In other words, you are upside down the minute you start. For some people, it’s worth it. There is a house going in a few doors down from me. They are about 1.2 Million into it. They’d be lucky to sell it for $800K.
I think it goes both ways and should depend on a person’s particular situation. Renting can be the right decision for people who live in areas with expensive housing, people who move frequently, and people who don’t want to do home maintenance.
With interest rates so low, buying has become a more attractive option for many. I personally own a home but it makes sense where I live. Renting is quite pricey in my area so it wouldn’t make much sense for me.
One thing missing on your list is can you rent something that meets your current needs. Often in small towns there are not the rental properties and purchasing a home is needed to find a place you want to live in.
Yes! My city has lots of rentals — student rentals! They’re over priced and not in great shape. It’s frustrating how that affects the market.
I like this article too – it’s well balanced and thoughtful. Pretty much the only things on your list I DO have are a strong relationship and a desire to garden, both of which can lead to wonderful happiness in a 1-2 bedroom apartment with a little outdoor yard or balcony space for the foreseeable future. I love not having to deal with fixing my own broken outlets and such, and having the potential for mobility, since there are grad school graduations and job changes coming up soon.
It’s good to not want that classic “American dream,” at least in the near future, when you don’t have the income to actually buy a house, though. If we did want it, we’d have to be saving really, really hard and looking to move to the suburban midwest or somewhere property is much cheaper.
Lots of good points. We are a real estate family. We own a 1920s historic home as a primary dwelling and we have three rental properties and a fourth piece of land.
A home, especially a historic home takes effort to maintain. Thankfully, Mr. Sam is handy and with three rental properties he has, at this point, undertaken just about every home project.
There are benefits to home ownership, I would say the most important benefit is getting to the point where your mortgage is paid off and you are able to take the money you would put towards rent or mortgage and put it towards something else. This, of course, assumes you’ll pay off your mortgage and lots of people don’t b/c the refinance or they move on to another home and take out a new mortgage.
The joy of owning rental properties is that someone else pays the mortgage, the taxes, the insurance, etc. And again, once the mortgage is paid off, there is good profit intake or when you sell there can be profit as well.
Since 2008, I have faced this situation three times. In 2008, I was in the Air Force and just moved to the Omaha, NE area. We had just moved from overseas where we had saved enough for a downpayment on a house. It was my intention to retire from the Air Force and find a job in the area. So we bought a house.
I retired in 2010, and had interviewed for a couple jobs in the area. I don’t think I was a good fit with one company, and the other wanted three years of a certain kind of experience where I only had one year of experience. That’s when I got a call for a job in the DC area. My military retirement was definitely not enough to pay the bills and we were incurring more and more debt, so I took the job in DC.
When we got to DC, buying a house was completely out of the question. Prices are ridiculous there. So we rented a townhouse and rented out our house in Nebraska. The income from our house was enough to cover the mortgage, but not quite enough to cover taxes and insurance. But with the equity I was getting, we were about breaking even.
It turns out I probably should not have taken the job in DC. I was underemployed and underpaid there. After about three or four months, I started looking for another job. Of course the job I found was not in the DC area, so we had to move again, this time to Syracuse, NY.
I had planned on renting a house in Syracuse, but the real estate agent I was using discouraged me of this. We wanted to rent a house, but she said there just weren’t very many available, and that we should try to buy a house if we could. Well, we had no money for a downpayment, but I called my bank anyways. They said I could get another VA loan (I already had one for the house in Nebraska), as long as the purchase price was between $142K and $211K. Those were kind of odd numbers, but I did some digging and found that the upper limit comes from the VA limit of $417K minus what I had already borrowed on the first loan. So we found a house in that range.
We really did want to own our home, and now we own two. I refinanced the house in Nebraska just after retiring and before moving to DC, and will not break even on the closing costs until January, 2014. I will probably sell the house late next year and take the small hit from the closing costs so that I won’t have to take a bigger hit due to the 2/5 rule (must use house as primary residence for 2 out of last 5 years in order to avoid capital gains taxes in the sale of the property). Being a landlord is not that bad, but I would rather not live half way across the country from my rental property.
I live in a city where on paper, it makes sense to buy. Housing is cheap and plentiful. We thought about buying. But when we looked into it more, the rather small area that we were willing to live in was pretty expensive–at the top end of our budget. And all the houses are older and would require at least some renovation to make them liveable to us–none were at the point where we could just move in. Also, we’ll be here another four years at most, and I don’t want to be tied to a place longer than I have to because I own a house I need to sell. So on paper it makes sense to buy here, but in my heart of hearts, I know I’d rather rent and then, when the time comes, turn in my keys to the leasing agent and move on without looking back.
We are really into DIY and gardening so that made the decision to buy very clear for us. I also see my friends and family who rent get hit with unexpected surprises pretty regularly – like my neighbor whose landlord just told them the rent would go up by $400/month for the next year term (they are foreign service so it makes no sense to buy). However, a renter doesn’t have to worry about the basement flooding or the new roof or the tree that needs to come down – they just call someone and it’s taken care of. I really like the approach of this post – it’s a good version of the classic pro and con list, and the answer is definitely not the same for everyone.
My wife and I didn’t struggle with the decision to buy or rent. We passed all the not Neil checks. Our issue was we bought way more house than we needed. It wasn’t that we couldn’t afford it, it was just too big. Now I consider how long it will take to clean a house before buying it. Excellent work on the Neil list, I think he’d be proud to have his name on it.
I think in general these are great guidelines to look at, but in practice some of them bother me.
Being handy and enjoying yardwork isn’t necessary to enjoy homeownership. You can learn to do basic around the house repairs, and if you’re not too much of a DIY person just don’t buy a fixer upper. I think that’s a bit of an unfair yardstick.
As far as financial/job stability … well you never really know, do you? And as long as you’re sure you can afford the home even if, say, one partner lost their job I don’t think buying a home when there are a couple of career question marks is necessarily terrible.
I agree with this. We own a house and while DH is very handy with electrical stuff, not so much with other things. We actually pay someone to do the DIY stuff – painting, installing new windows, etc. While it does add to the cost of home ownership, it doesn’t mean that we shouldn’t own a house.
I think the biggest idea here is not to buy unless you’re sure you’re going to stay there. I think in the last housing boom too many young people bought houses – it’s psychologically a thrill to be a home owner at 22, but I think most people aren’t settled enough that young – they still want to move, change jobs, maybe get married and have children – and it’s harder to do all of that when you have a house.
I agree with not buying a fixer-upper if you are not into DYI. I had a father who could do a rough but ok job on fixing things around the house. I expected that my husband would be able to do the same. After a few years I realized that this was not the case and when we bought a house I knew not to say ok to a house that needed work because it would just be frustrating to get my husband to work on it or expensive because we had to pay somebody to do it. I can do small jobs like paint the kitchen, and am the one who loves to work in the garden and pull weeds.
Good post. Home ownership is not a big dream to me but I feel like everyone else I know is obsessed with it. It’s not a good investment in the city I live in (my rent is about $600 less than a mortgage would be for the same place) but people don’t look at that, they just want the “dream”
The better way to put it is that it’s *their* dream. There are real reasons to want to be a homeowner. There are also real reasons to NOT want to be a homeowner.
Thoughtful consideration (like the ones outlined in this article) is key to making a wise decision.
I’m curious if anyone can point me in the direction of a good resource for comparing the costs of buying vs. renting.
This is a timely article for my husband and me – we have a baby on the way and hate the idea of staying in our 2BR apt after he arrives. There are virtually no children in our complex, and we want to be in a neighborhood. However, rental houses near us are very pricey. It seems like throwing money away. But, we’re not sure if buying a home is really the best option either. A mortgage is less than renting up front, but what about all the taxes, upkeep, etc. that come with owning?
(We can’t/won’t move farther out for cheaper housing because the traffic is so atrocious here it would result in hour+ commutes each way. We wish that was a feasible option!)
Here’s a good calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
It can be hard to judge, though. When we bought (2002) I thought a bunch of things that turned out not to be true:
*local home prices had gone up so much already I worried we were at the peak of a bubble (ha!)
*rents had been increasing way past affordability, and I assumed that would continue (instead, they stayed at about 2002 levels for 7-8 years and now are increasing again)
*property taxes would remain stable. Instead, they are going up and so are city-run utilities.
*my salary was stable. I was working in the newspaper industry so you can just imagine how that one has gone…
http://www.smartasset.com/welcome
I totally understand the need to have a house with a baby on the way, but it’s really not necessary right away. Babies don’t play outside, and dealing with all of the stress of a new house while pregnant probably isn’t that fun! We started looking for a house when our first son was born, but we didn’t buy it until he was 2. So please, don’t be in a rush to be a home owner by the time the baby gets there.
Monica, listen to Sara. You really can’t imagine what having a baby will be like until you have one. You’ll have a MUCH better idea of what kind of house you want once your child is born and mobile. Table this decision for a bit.
Thanks for the suggestions! All good things to keep in mind! We’re trying to look at the situation realistically from all angles, which is hard to do when we’re so eager to have space of our own.
This is such a highly personal question. I am definitely a Neil but I have owned since 2009 and love it. I did a few things right in my shopping that ensure it would be a good fit.
The number 1 best choice I made was I did NOT buy a fixer-upper. Believe me, I looked at some, and one even made my short-list because of the appeal of what could be there, but the reality of the situation hit home when I brought my parents out to see my choices. I showed them 4 houses that I really thought could be it. At the end of the day they said, We love you, but none of these are the right houses for you. They could see the situation much better than I could at the time. Dissapointed, I listened to them and kept on searching.
Here is the second thing I did absolutely right. The house I settled in is the right size for me and everything inside is modern. Small and efficient leaves very little room for uncontrolled maintenance costs or endless upkeep. The projects I have done have all been small and manageable. Keep it simple and keep your actual needs at the forefront, not your what-ifs.
Although I am not transient (52 y.o. and have a government job that I expect to be in for the rest of my career), renting fits my needs. I am not handy and have no desire to spend my weekends maintaining a home and yard. There are not many condos in my area. I am single and live alone, so if I bought a house I would most likely be buying, paying for, and having to heat more space than I need. I have a 2 bedroom, 2-story apartment with no upstairs or downstairs neighbors. It is part of an 1880s Victorian mansion with beautiful and well-maintained surroundings. The monthly cost (rent plus utilities and renter’s insurance) is comparable to what the monthly cost would be to buy one of the least-expensive houses in my area (mortgage payment plus utilities and homeowner’s insurance), but that would be in a much less-desirable neighborhood. It would also be an older house with significant and unpredictable maintenance costs. A few years ago, before I moved to my current apartment, I was looking into buying a house. I am now glad that I decided to continue renting.
Second what John said. An important factor in measuring renting vs. owning is the amount of space one needs. I’m very happy in my 1 bed/1 bath apartment, but if I bought, I’d want at least a 2/2 for resale value and appeal. So I’d have to heat, cool, clean, and furnish at least 50% more space than I have now. (And cooling space in central Texas is nothing to take lightly.)
We are planning to relocate soon and after selling our current home we won’t be taking much with us from it financially. Therefore we feel like we’ll need to rent for a few years and save up to buy again. The only problem is we have 4 kids and a dog which makes finding a rental we can even squeeze into, let alone be comfortable very difficult. I’m not sure I can stomach a $2000+/ mo rent when a mortgage payment would likely be under $1200-1500/ mo.
I love this article. I bought a condo about 8 years ago, just before the prices peaked. It was mostly an emotional decision, after moving out of a house I bought with an ex. At the house buying time, we were a Neil. While my condo is now underwater, the mortgage and condo fee together are less than the rent for a comparable rental. So we are staying put and trying to make it work even though we have outgrown the space.
One more item I would add to the list would be “distance to family”. Especially if you are planning on having kids, having family nearby comes in very handy.
“I went to the Home Depot yesterday, which was unnecessary… I need to go to the Apartment Depot, which is just a big warehouse with people standing around saying, ‘hey, we ain’t gotta fix sh*t!'”
– Mitch Hedberg, describing how I feel about home ownership
As someone who lives in LA, has a shaky freelance career, and hates home maintenance, I’d say the answer is pretty clear. I do hope to owe a place of my own at some point, whether it’s here or somewhere else…I just know it’s not possible now.
I appreciate the “owe” instead of own: a convenient Freudian slip.
This is something the boyfriend and I were discussing only yesterday. I am about to begin a 4 year PhD in Biology, he is starting a 2-year Masters in Architecture.
After I finish my degree I will be moving jobs every 3 years or so (the normal length of a funded research project), so I said that it would be a mistake to buy a house then.
His vision is skewed by his architect-y mind and he believes owning a house is the only option. Much as I try to persuade him otherwise, he does not accept that renting for another ten years or so is a financially wise option.
I need to run the numbers and show him the proof!
Never buy real estate with a “boyfriend.” Or “fiance.” Only husband! Things get really, really ugly when a breakup comes along.
See all the likes to SLCcom’s comment…repeat, do NOT, NOT buy *finance* with a boyfriend..
I hope the housing bubble taught us that a house is not necessarily a good investment. I worry when I hear people say that it’s a great time to buy because rates are so low. All that means to me is that rates will eventually go up. When the rates finally go up, the value of your home will go down. The timing could crush you
Another thing to consider is the opportunity cost of your down payment. If you put down 20%, you have to consider that the 20% in the equity of the home could have been in another investment vehicle possibly earning a greater return.
Even if the monthly payments are less for the mortgage than for the rent, there’s no risk of losing equity and being underwater when you rent. You can’t be forced to sell at an inconvenient time. And, you’ll never be on the hook for a new roof or a new furnace.
Also, home prices are being kept artificially elevated by the government. Though that could last for quite some time, it seems like a gamble to me to buy right now. All that being said, I’m still excited to one day own my home.
“When the rates finally go up, the value of your home will go down. The timing could crush you”
Can you explain this in more detail? Is this always the case?
I’m genuinely curious.
Sure! I’m not sure if you’re asking why rates and prices are inversely proportional, or why rates inevitably go up from here, so I’ll try to answer both.
When rates go down, you don’t have to pay as much in interest, meaning you can afford a higher-priced home than otherwise because more of your money can go towards payment of the principal. Sellers can then raise prices. When the opposite happens, ie interest rates go up, the interest payments eat up more of your budget. Therefore, buyers can’t afford quite as much in terms of prinicpal. Therefore, sellers are forced to lower prices.
As for interest rates inevitably rising: the reason why rates are so low right now is because the Federal Reserve sets interest rates purposely low. This allows the US government to pay near-zero interest rates on its debt right now, because everyone thinks its the safest bet. We have ~$17 trillion in debt, and the only way to pay it back would be to print money, therefore destroying our currency. Either way, there will be less demand for our dollars, and the government will be forced to pay higher rates on its debt. When this happens, the interest rates on everything else will rise in tandem, including those for your mortgage. Again, sellers will be forced to lower prices because people will have less money available to go towards the principal payment because it will get used on payment of the interest. It’s hard to tell when this will happen, but either way, expecting interest rates to remain this low (lowest in history) is really risky, imo.
Hope this helps! If not, I can steer you toward someone who can explain it better.
Thank you! That does help.
So I guess the smart way to go is buy when interest rates are high and be in a position to refinance when they are low.
Then stay in your house forever. 🙂
Haha! Perhaps that’s the smart way. You can usually refinance if rates drop, but not if you’re underwater or if you’re way behind on payments. I guess my point is that rates don’t really tell much at all about whether a house is a good deal or not. If it was that simple, we’d all be rich. A good investment, whether it’s a home, a stock, a bond, etc. requires much deeper analysis than simply looking at interest rates. Perhaps interest rates would be more telling if they weren’t artificially manipulated, however.
Without a doubt the smartest financial decision we’ve ever made is to buy our home.
which we were very fortunate to get at a great price and we’ve stayed put. Like Sarah, we are homeowners at heart. We enjoy doing our own repairs. And with nearly all my husband’s extended family in the area and with the roots we’ve all put down on our own, we have no intention of moving. And in fact, we could meet our low monthly payments with odd jobs if we had to.
I will say the biggest perk of not moving up once we could afford it is the lifestyle inflation our small monthly payment has afforded us. We now farm out the unpalatable maintenance which for us is the outside work. We pay somebody $25 a week to mow our lawn and blow out the leaves in the fall. (22 to 30 weeks per year). We also pay a Lawn Doctor type company to keep the front yard’s grass green and weed free – that runs us about $300 a year.
Somebody up there must’ve sent this piece to me.
I’ve lived all my life in extended family situations, paying rent to relatives for use of a room in their house. I’ve been unhappy with where I’ve been for several years now, but the rent is low enough that I’ve been able to fully fund my Roth IRA and 401(k) plus stash away a tidy little rainy day fund.
I want (and can afford) a place of my own now, even if it does mean only throwing a percentage of my income into my retirement accounts.
Part of me wants a house in a town that would add a lot of time to my commute to and from work. Part of me wants a local condo.
I have no trouble handling the physical running of either one, except for the fact that I’ve never lived alone. And I am scared. I admit that.
Maybe starting out renting is something I should give serious thought to!
You can barely find a house for rent around here, there are apartments available no problem, but there are hardly any actual houses, and even fewer if you have pets. We didn’t want to be subject to the whims of other people regarding what we can and can’t do with our own home. If I want a dog, I can get one. I built a chicken coop in my backyard. How many landlords would let you do that?
The best part about home ownership is the sovereignty you get over your own home.
Watch out for the HOA, though! I never realized til friends of ours started buying houses in the suburbs how tight those rules can be. My in-laws live on a lake but they can’t have a boat in their driveway after dark even one night.
I wouldn’t buy a house with a HOA.
Word.
My sis had to petition the board for over 6 months to install a clothes drying rack outside. Initially it was a flat denial.
Nail on the head here. The thought I have is that owning your own home also allows one a certain amount of freedom to explore money making/saving hobbies that are not likely available for those renting.
For instance, my husband does a lot of car maintenance and restoration. This is a ‘productive hobby’ and while we are in not delusional in thinking that it will make us money – it’s ‘cheaper than sitting on a barstool’. But to rent a home that would be comparable to what we need to pursue this hobby in enjoyment (enough space to work, appropraite electical) we would for sure be paying more than our mortgage. Likewise if I had to rent studio time to engage in my hobbies instead of using the space we set up in my basement – it would start to get very expensive indeed.
One of the things that people forget when they ‘run the numbers’ is that you really only save money on a house and can use it as an investment if you someday PAY IT OFF! Trading up every few years is a sure fire way to spend more than rent, having NO MORTGAGE PAYMENT is a way to financial freedom.
I wrestle with this too. I live in the Boston area where small single family homes start at $400k (the ones in our neighborhood we rent in are in the $600-700k range). We currently rent a 3 bedroom/1 bath (we are 2 adults/2 young kids) for $1600/month and are saving for a down payment to buy a house. We are living as frugally as possible to save up $75k in cold hard cash just for the downpayment to buy a house.
I sometimes wonder if home ownership is even worth it. After I purchase a home, my monthly mortgage payment will be $500 (by most mortgage calculators) more than I pay now in rent plus I will have property taxes and general upkeep expenses on top of it.
Yet, “everyone I know” does it – I am the last of my friends to still rent. Granted, I am the only one who has to save up the cash for a down payment – most got money from their parents and/or got some wealth from company stock options.
I know that I could move 30 miles out and get a better deal on a home but commute issues are big with me and we spent the past 5 years in our town intentionally trying to build up a community of friends for us and our kids that I would hate to move too far away.
I think I’m more Neil than I’m not Neil. (One of) My current financial goal(s) is to save for a down payment on a house. And while at this point in my life (stable relationship with a homeowner), there’s no need to buy a home, I’m still gonna save for one. If it turns out that I never need/want to purchase a home, I’ll have that money for a lovely travel fund. Win either way.
My husband and I have evaluated our options time and again when it comes to renting versus owning something. Ultimately, we decided to look into purchasing a small one-bedroom co-op which, after putting down 30%, will be cheaper than our current rent. (This includes mortgage and maintenance.)
Aside from the tax deductibility from the mortgage, our maintenance fee is also approximately 50% tax deductible. Down the line, if we want to sell it, we will get our money back in terms of a down payment and hopefully we make some money on the deal. If I break even, that’s fine since I was saving money from what I otherwise would have been paying in rent. (The place we are looking at right now needs some work, but it’s also priced lower and the potential to flip it a bit is there.) If not, this co-op will allow you to sublease after two years—something I could make a profit on while not having to repair anything personally. This particular market in my area is pretty stable so I am not too worried about housing prices decreasing.
Houses or condos? That’s another story. No way could I afford any of those in my area.
As someone who was never in and probably will never be in the position to buy, this post is very refreshing. Those of us on the outside of financial stability and home ownership was made to feel inadequate and a loser for not being in the position to buy for far too long.
Though having my own place to customize and make my own, having a garden, etc is something I’ve always wanted (especially after having grown up in a home that my parents owned) I know it’s nothing more than a pipe dream.
With that said, where I live the rental market is ridiculous. Its not as bad as it was when I was in the Bay Area but I see it getting there. The market has many people up against the wall: either live in a very so-so and non aesthetically pleasing and not very safe neighborhood on the outskirts, or live close-in in a very walkable neighborhood and pay through the nose.
I live in the latter and wonder how much longer my apartment is going to be affordable for me. If I’m pushed out, I have no clue where I would go.
Same for me. Owning a home will most likely never happen for me either…I’m too poor, and my life situation is too precarious. No significant other, no stability, poor health, etc.
I *was* forced out of SoCal by rising rents. I simply could not afford to live there any more. Had to move back in with parents…so humiliating. Still trying to change all the problems in my life. It’s so slow-going, and I’m already out of time.
If you are crunching numbers on this issue and still unsure, maybe it will help to check on what plumbers, electricians and carpenters earn per hour in your area.
I am now in the process of selling my house and it was quite the learning experience getting it ready to sell after many years of raising children and deferring maintenance on the house. If you don’t have the work done when it needs it, it will bite you in the butt later. And all houses need an amazing amount of upkeep.
I wouldn’t say this. If you speak to a number of homeowners I’m sure a few would tell you they haven’t had too much go on for x amount of years.
I’ve been in my house for 3 years and other than elective remodeling items (and needing to replace the roof per my homeowners insurance…which won’t need to be done again for 20 more years)I haven’t needed to replace anything. Of course it varies from home to home but I’d say a majority of the homeowners I know can go years without a major issue.
I just purchased a condo, and the people who used to live there didn’t like doing the preventative maintenance. I’m rather amazed to find out that they hadn’t burned down the building with the amount of lint that I found in the vent tubing (and the dryer “didn’t work” – no wonder they left it for me…). Little things to help along the way can do a lot to make repairs cheaper, and small repairs when they pop up can turn into huge problems if left unchecked. Something to be aware of with home ownership. The small leak that doesn’t seem like an issue could lead to a huge mold issue. Part of owning a home is the initiative to take care of things (and pulling out the wallet to pay for it…)
One more thing – consider how much time you like to spend on house and yard upkeep.
I agree that a lot of people who are too young rush into home ownership but you also have to look at it from the perspective of the current market and you don’t want to realize in 5 years that you wished you would have bought a house when the market was easier or something. However, if you don’t think you’ll have that feeling for 10+ years, houses will still be around and I don’t see a problem with spending those 10 years putting away 1-2,000 dollars a year to go towards a hefty down payment.
$2000/yr for ten years is a “hefty” down payment? Not in my neck of the woods. $20k won’t even get you 20% of a crappy condo here.
Alright – we get it. Lots of people who read GRS live in housing markets that are sky high. Invariably someone comes on a comment like this and says, “Must be nice to be able to afford a house for $150,000. That would buy me a cardboard box in San Francisco.”
I guess I tire of the repetition.
Except his math flat out doesn’t make sense for most of America.
According to a May 9th, 2012 article (Bloomberg), the median price of a home in America is $158,100. Saving 10k-20k isn’t going to be a hefty down payment on that even if prices remain unchanged for ten years. Hell, even for your example of 150k, 20k (his high end!) isn’t “hefty.”
I admit, I am being US-centric, but I’ve only also known the market in Seoul, and you don’t even want to get me started on that market.
You’re correct, Amanda, on the use of the word “hefty”. Only in very rural America would $20,000 be a “hefty” down payment. There are 2,000 sq. ft. homes for sale in the town my husband grew up in that are $60,000. These are nice homes.
But, no, for most of middle America, a significant down payment would be more in the range of $50,000.
I was always going to be a homeowner and knew it, even from the age of 10. It definitely has to do with the fact that most of my family lives here, and they are homeowners as well. Of course living in an area where homeownership is not just for the rich helps as well.
I never wanted to rent, I hated renting (even before renting), and was forced to rent while I was in school…which only solidified my dislike for renting. If I lived in a different area, then maybe I would enjoy it.
Mainly I like the idea of one day not having a mortgage. Yes, I know there will be taxes and insurance, and increases of both, but I am doubtful that they will ever exceed rental rate increases, especially for the area and the size home I currently have. Basically I cannot afford to rent my house now. According to Zillow the rent has increased to $926/ month for my one-bedroom house in the city. Since I bought my house 3 years ago the PITI (principle, interest, taxes, insurance) has gone down $100 and I currently pay $503 for all 4, almost half the rent…and one day $385 of that payment (my mortgage) will disappear. In FL there is a limit of 3% tax increase for homeowners, so at least that is also controlled, so the only thing I cannot predict is the insurance.
That being said, it is work. I happen to like that kind of work though and I like profiting off of it. I’m currently saving towards my first investment property. My primary residence payment is so low that it frees up extra income to make those sorts of investments. For my situation, buying was the single best thing I could have done for my future. I have so many options available to me that I would not have otherwise…for some people homeownership may present an opposite experience, but I’m definitely using it to its full advantage.
Me too.
I couldn’t wait to get old enough to buy my first house!
My grandmother owned 8 small houses when she died that she bought one by one with savings and rented them out. She was from the old country and owning land and a house was a big deal for her.
I’m a DIY and a gardener and love all things Home & Garden.
I bought my first house at 25 with a down payment my father left me (he died when I was 22) so I was fortunate in that sense.
I paid $265,000 for it at the apex of housing boom in the Bay Area in 1989. It’s only 1200 square feet, built in 1926 and I fell in love with the old neighborhood. (Old for most of California 🙂
It’s now worth about $1.1 M down from a high of $1.5 during the last boom. But still worth every penny I’ve invested obviously. And I love it. Spend most of my weekends cooking, gardening and decorating.
So this is really a region and situation specific question.
If I had the “extra” money that I wanted to part with I would buy he beach cottage I’ve always wanted but I can’t seem to commit just yet.
I think another key is missing here –You need to be willing to compromise your dream.
My wife and I rate high in the “should own” category. Very DIY, we rank high on the handyman scale, love gardening, renting is more expensive where we live etc. So, we bought when we moved to the Twin Cities 3 years ago.
Our dream is to own a 5br home with a separate dining room on 5+ acres somewhere with water access and far enough out of town to hunt on our own land.
Instead, we compromised and bought a small foreclosed 3br 1950s rambler on .22 acres. It meets our needs, we have a garden and we love owning it.
Maybe someday we will be able to find and afford our dream home, but our quarter-acre is enough to keep us satisfied for now.
This article is very house-centric, which is fine because that is what most of the U.S. market lives in, but you don’t have a lot of these issues w/ a condo/townhouse. There is no yard and maintenance is a lot more affordable. Of course you also are paying monthly maintenance fees, so there’s that to consider. I think the market is the biggest factor to consider, which depends on location. I don’t think I’d ever buy in a small city/suburb. Not enough volume. In NYC/Brooklyn we have not only domestic buyers, but international as well, and renting out your apt. for a week, a month or a year is not an issue. If I get a new job in another country tomorrow, I can rent my place for a profit overnight (literally) and be gone by next week.
I’ve dreamed of home ownership since I was in high school (I’m weird I know). Now that I am a homeowner I love it. But I totally understand its not for everyone. My two big reasons to fight “Neil” would be 1) Buy a home you could rent out if you want to travel. I love my new house, but I’m okay with parting with it for awhile if I want to move to China for a couple of years for example. 2) Buy a forever home, something that can grow and adjust with you. Roommates now and babies later (so far later…)
For me home ownership has been a very positive thing. I have owned 4 houses so far, 2 of which I bought cheap and flipped for a hefty profit. In fact, between 1999 and 2001 I made over 120K in profit which was a lot of money for my area in Canada. I have made a profit from the sale of all of my homes (less on the last one but that wasn’t a flip and I only stayed in it for 10 months) and will most probably profit greatly from the condo I have now.
As a poster said before it doesn’t have to be all about maintenance or gardening etc. You don’t have to buy a fixer upper and you don’t have to spend tons of money and hours on a garden. I never did even with my flips. In fact, most of the work I did on them were minor cosmetic things like sanding floors or updating the kitchen counter. New windows are also pricey but my investment paid off.
I am going to be mortgage free in 2014. This to me is also a great thing because I won’t have to work at a very high paying job I used to love but now hate. In all, I took 7 years to pay for this condo and I am receiving requests from real estate agents frequently asking if I want to sell it. If I wanted to sell it it would be on the market but a few days and I would make a lot of money.
This being said I can totally recognize the advantages to renting. When I was making money flipping some people wanted to do the same thing as me and some fell flat on their faces doing so. Their flips turned into flops.
Until recently, we were all being sold the idea that owning was the only way to be rich, that a home was a great investment, etc!
What I would tell people during my flipping era is what I tell people now: buy a home because you want to, not because that is what you are supposed to do or because you want to invest or make money. You will pay a lot in interest (which is money you threw away) unless you have a solid repayment plan. As for flipping…now is just not the time! Besides, you really do have to know what you are doing.
People should really learn to question ready-made dreams and supposed common sense…
Making money flipping house is disgusting to me. A house is not a commodity; housing is for people to live in.
The housing bubble in Canada is very bad and the fallout when it bursts is going to be tremendous (see USA). Flippers like yourself are one of the principle drivers, along with terrible government policies which shift the risk from the banks to the taxpayers with the CMHC.
Good for you making $120k for your trouble, but don’t gloat about what has happened in Canada until you feel the aftermath when the bubble bursts.
Not to mention that house flippers often use the cheapest materials and cut corners to make even more money. The house next door to ours (which is identical to ours) was flipped. The flippers who are realtors bought the house for $50,000 and sold it six months later for $150,000. Granted that house was in bad shape and needed some fundamental work. There were holes in the ceiling and it didn’t have a working toilet. But I would have much preferred that the actual person who planned to live in the house do the work. My guess is they put around $20,000 tops in that house.
Four years later the couple who now live in the house are complaining about how the cheap cabinets in the kitchen are already falling apart. Paint is peeling everywhere in the house, because they slapped on the cheapest paint and didn’t clean the walls underneath. Believe it or not, the new driveway was made just long enough to meet code. It ended up not being long enough to reach their back deck stairs, so the dirt in between is a mud pit in fall and spring.
Ask at open houses if the house you are looking at is a flip. If it is, move on to the next.
I lived in both of the houses I flipped and I didn’t use cheap materials which is why my houses sold well.
I am sure some flippers do use cheap materials.Sorry, I don’t know them.
My main motivator was because I like renovating houses.
Builders build crappy quality houses too. Flippers are not all the same and often live in their “flips” for some time.
Many people have no desire to do DIY of any kind (whether YOU prefer they did or not). Just watch any HGTV show and you’ll see people walk away from an ugly paint color.
A lot of flippers are merely people who don’t mind putting in some sweat equity, then cashing in on that equity early from someone who DOES mind putting any sweat into a home.
I’m so struggling with home purchasing decisions!
My main motivation is that I want to have a place paid off by the time I retire, but the fact is that taxes + maintenance (+ HOAs if I’m in a condo) may largely equal whatever rent costs. So does it make sense to spend 20-30 years of interest? Maybe not. But I’m still turning it over – it’s kind of agonizing, honestly. And I think is one of those questions that emphasizes the personal aspect of personal finance.
I’m right there with you! I keep thinking this decision would be easier if I had already met my husband and had kids. It’s so hard to buy for a future you can’t visualize yet.
In the meantime, the debate continues — and I can sock away more money for a down payment. I figure every dollar I put away now saves me about 30-40 cents of interest in the long run. It adds up pretty quickly.
Early in our marriage, we collected some peer pressure re: buying. Various friends were buying. We saw what they were buying, and where: small houses in undesirable neighborhoods, or big houses way too far out of town.
We live in a large apartment in Beverly Hills, CA. To buy the same square footage in the same – or a similar – neighborhood would cost us roughly 3x what we pay in rent.
We are soooooo glad we *didn’t have* the money we would have needed for a down payment, because if we had bought 6 years ago we would be so, so screwed.
Toronto is in a major housing bubble, just sitting on cash adding $1-$2k a month to my downpayment until 1) I retire and move some place not housing bubble crazy 2) house prices correct in Toronto or 3) I have enough saved to buy a house outright.
Condos are affordable-ish but WAY overpriced relative to renting the same unit, and I have no desire to sink $500k into a box in the sky where you have mortgage interest, property taxes, one time special condo assessment repair bills, AND condo fees. I’ll let my landlord pay for those in return for rent and save the difference in high yield preferred share dividend funds.
It makes me sick when I look at how prices have inflated because of cheap easy credit (we had zero down 40 year mortgages here until recently, the government is intervening but with record low interest rates, Canadians just borrow more and more and sink it into RE driving up prices).
Apparently we didn’t learn anything from the USA over the last 6 years.
Oh yes, and some experts say foreign investment has keep prices high in markets like TO and Vancouver. It’s all a matter of supply and demand and it doesn’t matter where the demand comes from.
I’m somewhat relieved that the government has set stricter limits on mortgages — like 25 year amortization or less. (No more 30, 35 or 40 year loans!)
I love DIY and would love to own my own home instead of renting. Renting is a landlord lottery- you might get the nicest, most chilled out one on earth, or you might get a money grubbing scumbag who doesn’t care about the upkeep of the property at all. I moved into my flat over a month ago and the landlord still hasn’t fixed a single thing on the list we gave him when we moved in (for those of you going “why did you move in if it’s so awful?”- the renting market for students in London is cut-throat and we were assured by the agent that these issues would be fixed).
For example, in the bathroom the tiles that surround the bath are not high enough up the wall. This means there is a large patch where the paint is starting to come off. If this was my own home I would chisel off the tiles, repaint the wall with proper bathroom paint, not cheap crap, and then tile higher up the wall. But I can’t, because it’s rented and if anything went wrong my landlord would go crazy.
But on the other hand I’m a complete nomad and once my degree is over I’m probably going to leave London for cheaper shores. Still it would be nice to have a base camp that wasn’t my parents’ house.
We just moved to a new area for my husband’s new job so we are a bit on the transient side right now. In our new area there are very few nice rentals and a ton of affordable options to buy, but we still feel that we’re at least 3-4 years from buying because we want to pay off all of our debt first (only 8 months to go!) and then save up a large down payment and savings for repairs/maintenance before we purchase anything.
We’ve been transient for some time following his academic career but our attitude has been mostly to ENJOY renting. This was a revelation to us, to just stop feeling bad about renting. Right now we’re in a new construction duplex with 3 bed, 2.5 bath, 1 car garage with a yard for under $1K USD. It’s very nice.
Our dream is to own a tiny and inexpensive rustic cabin in the woods. So we have talked about the possibility of renting our primary residence close to work but, and after we’re in better financial shape, buying a cottage for relatively very little, around $50K. We would likely use it as a partial year residence during our retirement, but at this time we’re focused on a place to create memories as a family (hiking, canoeing, campfires, etc). The New York Times has written about a few couples who have done this (they rent in the city and buy a cottage in the Catskills). Would be interested in hearing from people who have done this and how it worked out for them.
Very thoughtful and well written article.
Goodness, I am Neil! Thanks.
For anyone with health issues – ownership gives you more control. Some landlords spray for bugs monthly, for instance. On the other hand, if you end up in a neighborhood of barking dogs, it is cheaper to move if you are renting.
We’re still working on our emergency fund (self-employed, need probably a year’s worth of expenses), and paying back taxes, so I don’t foresee a mortgage any time soon.
However, even if I had money for a down payment:
-While our current city has been good to us, we don’t really like it enough to marry it, and we miss the East Coast.
-We got an artist residency for a few months next year and we’re thinking we’d like to apply to more. Don’t know where that would take us or for how long.
-We’re trying to get to a place where we can work from anywhere. My wife recently quit her crappy part-time job, so we’re more flexible in terms of location, but our clients are still in the area, so we’re stuck for the moment– going to a new town to start networking from scratch can be hard. So we need to go national somehow….
-We have a rural cabin in some family land . If we fix it up and build some studio space we could probably make it our base camp without having to incur a mortgage.
Note: While I understand not everyone has the luck of getting a free cabin, the base camp concept could be transposed: I recently met a writer who lives with his wife in a small apartment in a very large building but they spend 4 months out of the year working abroad while staying in fancy rentals
I really like the base camp idea. Ideal in early years of retirement when you are doing lots of long term travel. You are lucky to have the cabin. I think the thing I like most about home ownership is that you have a piece of land that is yours. You have a place you can pitch a tent if you need to even if the house burns down or something.
Yes, although when the whole city burns it’s easier to flee when you’re not attached to property. 😀
It’s important to rent, in order to help homeowners/landlords build their wealth and generate passive income imo.
My father owns eight rental properties, all of which have been paid for by renters over the past 25 years. Now he hires someone to take care of the properties and generates over $12,000 a month after expenses!
Renting is great for homeowners.
good article, I totally agree that you need to be sure of your relationship and future plans before committing to buying a house. Since I am sure of neither, I chose to invest in rental property, and use the proceeds to rent the place where I live, which changes every few months.
I lived in the flat I bought for a while and loved the “being home” feeling but it wouldn’t be possible to buy a house twice a year when I move around!
Loved this post.
We bought a house in 2009 after years of renting. The main impetus was security: we rented a lovely 2BR/1BA apartment in Brighton, MA for $950/month that was perfect for our needs for 16 years (2 rent increases from original $800 during this time). We were model tenants, quiet, paid the rent on time, did the yardwork and, per the landlady’s request, handled repairs (she paid). One day, she decided she was selling and didn’t want tenants there while she was showing it, so we got a month’s notice. (The person who bought it did offer to rent it back to us for the market rate of $1600. We said no.) From that time on, we decided we needed to buy, so that no one could ever arbitrarily evict us from our home again.
The second impetus was after renting a smaller 2BR/1BA apartment in Arlington, MA for $1200/month after the above event. It didn’t remotely meet our needs, and had an obnoxious neighbor on the other side of the wall who taught my son new curse words and would do things like throw shoveled snow from his car onto ours. Another reason to buy: not sharing the property with anyone else.
The problem with buying: the cost. Our 3BR/1BA cape in Malden was $270K; since we hadn’t planned on buying before (we were supposed to inherit a house but m-i-l got a reverse mortgage in 2004 instead, and when she died the sale just paid it off). 3.5% down FHA translated to a mortgage payment of $1454/month + taxes & insurance of $432 ($1887 total). For the first year. Next year, Wells-Fargo tells us it’s now something like $1990 (I don’t remember the exact amount now since I rounded up to $2K). Then it went to $2083. I dread what they’ll tell us it goes up to this October. Our rent never went up like this. This is already something like 45% of our takehome income.
This isn’t including the new roof and porch repairs that we recently discovered are needed (homeowner’s insurance won’t renew our policy until we make these fixes; they discovered the roof problem), along with some other leakage issues just discovered today. Current guesstimate is $8K for the roof, probably $4K-$5K for the rest. We have $4K in savings. We are shopping for the loan I never wanted to get.
Buy a house if you need security and relief from noisy and obnoxious neighbors on the other side of the wall. Don’t buy if it puts your finances in jeopardy. Sometimes needs collide.
what’s their explanation for the higher payment? They have to offer one.
Something about the way my city assesses taxes panics our mortgage servicer. Every year they send us a letter saying they are raising our payment to cover something not covered by the escrow account, and ever since the first year we just call them and talk to them about how this has happened multiple years in a row and it causes an overage before the next tax payment is due so please don’t change anything. The first year we paid the higher rate and got a refund six months later.
Their explanation boils down to “We did the math wrong, you owe more than we collected.” I only learned a week ago that the city was supposed to send us a tax statement each year. They were sending it to our old address and no one forwarded it. I now have a copy of the last statement; at some point I need to sit down and try to figure out if the numbers match, but a cursory look says it does. I’ve been told by homeowners that this kind of yearly increase is normal.
I just wish I’d known this before buying. Everyone says it’s great because your monthly payment never changes. They mean your mortgage payment only – the taxes go up each year.
I believe Mortgage servicers are required to do an Escrow Analysis each year (iirc, that didn’t use to be the case and in some cases mortgage servicers were able to hold/float those overages…like when people no longer req’d PMI).
Your escrow analysis should indicate how they calculate the amount needed for escrow. If you house was re-assessed for tax purposes, your tax bill could go up. When they did ours a few years ago, it literally doubled in value (which was true) so escrow payments had to increase. So it’s possible that they bumped it once based on what was available in escrow and then had to bump it again on the next analysis.
We’ve seen ours go up, sometimes in back to back years, but ours actually went down about $20 in the most recent iteration.
Just to clarify, a property tax bill is a function of *both* the assessment amount & the tax rate (often called the ‘mil rate’, which means $ per thousand). Even if your assessment doesn’t change, a higher mil rate can make your taxes go up.
Tax policy varies a lot is something to keep in mind when considering where to buy a house (that, only after a separate decision *to* buy a house).
Some areas have much higher or lower rates, some have limits on how much your property taxes can go up (some don’t), some have owner-occupant tax breaks (with extra breaks for seniors or low income) and other don’t…can all make a big difference to your likely future taxes.
My two cents – think of taxes in terms of annual burden to you. Some areas with high rates have low assessments and/or values, so the total out-of-pocket isn’t much different compared to a lower-rate/higher-valuation market.
Great post! I could also add: please realized that what you want/can tolerate may change as time passes. For 25 years I rented different apartments in a major city, and was perfectly happy spending my money and time doing things away from home, like eating out, traveling, social clubs, etc. Then at a point I realized that big city living wasn’t fun for me any more—dealing with noisy irresponsible folks on public transportation and in the apartment building I was renting, etc. I moved to a city in the SW where taxes and house prices are a fraction of what they would have been in my prior location. I bought a smaller, newish home, paid it off in 10 years, and have great neighbors. (Plus no shared walls to carry sounds like crappy music and screams during sex.) And no, it wasn’t my music or screaming!
So, what I wanted in the end was not what I started out wanting.
Wanted to add, even though I am a young homeowner (bought my house at 25 3 years ago), I fully intend to live in another country for 1-2 years in the future. Luckily I live in an area where I could easily rent out my home for twice the mortgage. Buying a home will do nothing to impede my mobility, though I understand why it may for others. I don’t plan on ever selling until I hit retirement.
Unless I marry somebody who has their own house, or have too many kids to fit in my house, I don’t plan on living in another house fulltime. I don’t want to climb the property ladder, but I do plan on adding rungs to it! Eventually I would like to acquire properties until I have reached 7, including my personal residence, renting out the other 6.
I am an ideal candidate for homeownership, yet I don’t care anything about it and neither does my husband. We have lived in our house 10 years and are happy to have a low mortgage in a great neighborhood, but we don’t see our house as tied to our dream. There are great rental houses around here, and we would just as soon live in one of them and have the flexibility to move when we want to and not have to deal with upkeep. But, we are homeowners anyway. Our main motivation is that we will be mortgage-free at some point, and that will be good for us. For us, homeownership is practical. But it is not the fulfillment of any dream. Our child, our happy family life, that is the dream.
It seems crazy that when the housing market is at its peak, there are tons of articles saying “buy, buy, buy!” and now that its basically at its lowest point, people are claiming that renting is better. If you are really trying to get rich slowly, purchasing a house at a low point in a housing market at the lowest interest rates in history and selling at a high point is one of the fastest ways to make money with very little actual investment.
For example, I put very little down when I purchased my house in 2009. I just refinanced because my home hit 80% LTV ratio, so I got rid of my PMI and dropped the total payment by $500+ dollars a month. My mortgage is now $1700 a month (including insurance and tax) for a 1800 sf townhome outside of washington dc. I have done about 20k in upgrades, so my kitchen is brand new and most of the home is updated. I love home reno’s, and have done everything myself.
A comparable 1 br apartment of equal quality is running $2150, just down the street. Plus $75 a month for parking, and $100 per month for two dogs/cats. Add another $850 on top of that just to move in.
So for $625 a month less (not including move in fees), I can have an extra bedroom, a small yard, pets, unlimited parking for free, a huge rec room, a large deck, and storage space.
And I would make about 50k if I sold my home today, even with factoring in real estate fees. I dont know where else I could have invested $30k and get an additional $20k out 3 years later. Ill take home ownership over renting.
And I almost forgot to mention that I get to deduct all of the interest from my taxes, which is another sizeable chunk taken out of the mortgage. Owning a house also saves me on moving and related expenses. Although selling and moving will eventually be more of a hassel than if I only rented.
I am pretty obviously a Neil right now, because I am only just starting grad school and my life will not be stable for the next five or ten years. However, I eventually see myself becoming a Neil – or at least a part-Neal. Personally, I have always wanted to own a flat, not a house, because I really am not the hands-on / garden / maintenance type.
I was wondering though – what if one partner is a Neil and the other isn’t? It is of course quite early for me to think about this, but I have talked about things like eventual home-ownership with my boyfriend. While it is something that we both see in our future, he wants a house, I want an apartment.
Any suggestions on how to solve a situation like that? I would certainly enjoy having a house, but I don’t want to be constantly maintaining it, and he does not want to pay for someone else to maintain it, which I can also understand. Still, I wouldn’t feel right about living in a house that only he is maintaining, but I also don’t want to feel obligated to take on tasks I could avoid completely by purchasing a flat instead.
Any thoughts?
Sarah,
if your friend’s grandmother is no longer with us, I hope she haunts that jerk living in her house. . .may he/she sorely regret being so jerky
For us, we made sure we had zero credit card debt, a solid emergency fund, 20% down payment, and job security. We also shopped for more than a year – and chose a less-expensive area to buy.
On the financial side, this is how I compare renting vs. buying:
Add the following:
A) The annual benefit of your mortgage interest deduction. In my case, I am at the front end of a $216k 30-year mortgage. I will shell out around $10k of interest to my lender this year, and I am in the 28% tax bracket. That makes my tax benefit $2,800 or $233/month.
B) The annual reduction in your mortgage principal. My principal reduction will be $3,500 or $290/month.
From this figure, subtract the following:
C) Annual property tax and insurance expenses. My property taxes and insurance are roughly $3,000 or $250/month. Remember that the government has a perpertual lien on your house in the form of property taxes. In general, a nicer neighborhood and schools mean ever increasing taxes.
D) An allowance for maintenance on the property. I am in a condo, and my HOA is $157/month, so I include that plus $1k a year, or $83/mo. for repair and replacement (appliances, plumbing, etc.) Factor in way more here if the house is older.
Benefits of homeownership (A+B) = $523
Added costs of homeownership (C+D) = $490
I show a slight benefit of $33/month as an owner vs. being a renter. My mortgage payment (incl. HOA, insurance, and taxes) is $1,500 and the unit would rent for about $1,500/month. As an investor, this would not work out, as any vacancies or tax increases would send my cash flow negative.
I consider the home an emotional purchase, not an investment. The days of second mortgages financing lifestyles are over. I bought because I liked the neighborhood and the city, and I am in a stable profession. I also believe we are going to face crushing levels of inflation soon. Debtors win when there is mega-inflation because the dollar is worth less but the payment remains the same. If you are able to buy a house with these low rates, by all means, do so. Run the numbers above and if it does not make sense, walk away.
We are debating just this question. We are somewhat transient – I am just finishing my PhD but have a job here for 2 years that may be extended depending on what opens up. My husband is midway through his PhD. And we are frustrated with the crime and terrible city services here. At the same time, rents are very high in our city and we are currently paying as much in rent (for a 1BR apt) as we would for mortgage+taxes+ins on a 2-3BR rowhouse. We also have a 15-20% down payment saved up, and we are absolutely sick of renting after having had 3 flaky landlords in a row. So we’re ambivalent at this point.
Your landlords may be flaky because crime is so high. In high crime areas, the police unions can easily convince politicians to increase their budgets, thus increasing taxes. The indirect result is your landlord is getting squeezed. If the neighborhood is trending downward, the landlord is taking on the risk of declining equity as well. [Disclaimer: I am landlord in lower-middle class areas of the Atlanta metro area.]
That said, I would say no to owning in your situation. It sounds like you are not in love with the city, and have a good chance of relocating once your husband finishes his program.
I’ve been in the housing business for 11.5 years, first working in property management and now for the government. I bought by house from Freddie Mac in 2008 for $167,000 in a suburb 15 miles outside of Denver. Originally I had a 30 year mortgage at 6.5% and my payment was $1325. Then I refinanced down to 4.5% (streamline FHA) and the assessed value dropped so the payment is down to $1106. Now I am refinancing again to a 15 year at 2.75%. My balance of $158,000 will jump to $161,000 but about 750 of my payment will reduce principal instead of about 250. I’ll make up the closing costs in about 7 months. I hope to have the house paid off before the 15 year term and if I move (which is somewhat likely given my job), renters will pay more than the mortgage. Even if I have costs associated with being a landlord, in 12-15 years, I’ll OWN a $200,000 home. My advice is this: if you plan to buy and are fairly stable, do it while interest rates and prices are depressed. Saving up an extra $40,000 is great, but not when the wait means that your interest rate is double what it is now. Historically, rates over correct. When my parents bought in Jan. 1991, the rate was 10.5% (after oil crisis in late 1980s). Also, my payment on this 15 year loan will be the SAME as my original payment on the 30 year at 6.5%. The low cost of borrowing is saving me 11+ years of payments.
The only negatives of this house are: it’s a little harder to get rid of a-hole neighbors and this is a little far to ride a bike to downtown. I’d love to live in the city but either the mortgage would double or my $155 a year HOA fee would be more like $400 a month. It’s far cheaper to live here and occasionally stay at a hotel when I want to live the downtown life.
I should add that rents are high in the Denver area compared to mortgages and I have a dog and a cat, so renting would be that much more difficult (my friend just moved to DC and is paying $200 a month in pet rent for her dog and cat – glad I don’t rent there). I’ve done a lot of work on this house and it has cost a lot of money. The only things that were mandatory were the roof, exterior paint, and hot water heater. The rest was me out of control. Also, I have a garden. It’s awesome but mowing the grass is not as fun. I going outside to pull weeds now as a matter of fact…