Real estate question: Rent or Own

[Earth_First]

I cannot help but notice the flurry of contrary economic data that is present here at Democratic Underground, and as young mid-twenties individual with a young family, I cannot but almost lay awake at night wondering what to do. I keep hearing that interest rates are going to continually rise and some speculate that they could reach the unprecedented levels seen during the Reagan tax cuts.

Ultimately what I am interested in, are some factually grounded opinions from which to base a substantial decision and weigh my options with some of your help. Should we bite the bullet now while interest rates are still moderately reasonable, or is there a more ominous lining to the economic forecast that would prevent you from making such a decision?

[soothsayer]

1. Where do you live?

[Earth_First]

3. Upstate, New York (Rochester)

Which, for the most part, is still quite reasonable on the West side of the city.

Taxes, now that's another subject.

[radwriter0555]

15. NO. Taxes are the FIRST subject. ALWAYS put your tax liability into the

foreground when it comes to investing. ALWAYS. And, make sure you know all about your taxes, your liabilities AND your advantages, since it's the advantages of your taxation status that provide the biggest benefit to you, financially.

If bush takes away the mortgage tax credit, it all but eliminates the reason for buying a house (other than for investment and profit). That potential has been raised.

So put taxes first please!!!

And in your area prices are reasonable at this time. You can find a nice home for a modest amount of money. It would be to your advantage to buy a home, and even more so, an "income" property, i.e., a duplex/triplex. With an income property, you get a little more work, not much, and a lot more help with the mortgage for the same price you would pay for a single family home.

Then, when you decide you want to buy a house of your own, you retain the property and rent out your own unit and let it pay you. It's a great thing to have when you get older, this automatic income every month. Doing this has made many people I know very, very wealthy in their old age, with little or no effort. Being a landlord IS a job, but it's your job, and very easy to do, if you operate it like a business.

[helderheid]

2. I am a licensed agent

If you can afford to buy, buy. Real estate is a great investment. Why would you decide to pay someone else's mortgage if you could afford to pay your own?

[MercutioATC]

4. Not to mention the tax advantages...

[Earth_First]

6. I choke every month when we write that check to our management company

knowing that we are building someone else's equity.

[CountAllVotes]

8. good advice

I rented for almost 30 years being I didn't have the money for a house and couldn't get a loan being my income was too low even though I had a solid job w/benefits, etc. They'd only lend me $40,000. which isn't enough to buy a house so I had no choice but to rent.

I luckily got a small 2 bedroom house before the boom hit in 2000. *whew* The house is now worth at least 3-4X the amount I bought it for now. Great investment is right! I don't plan on moving though - never in fact. I'm luckily I got a house. It is small and comfortable with low power bills, etc.

If this person qualifies for a loan big enough to buy, I'd say go for it, I agree!

:kick:

[barb162]

9. Though the markets can go down across the country

I see no reason to pay someone else's mortgage for their apt. bldg.

[Coyote_Bandit]

5. Depends

Where are you considering buying? What is the overall economic environment there? Is it trending up or down over the long-term?

How long do you intend to live in the same location if you purchase a home?

Do you intend to make a down payment or finance the entire purchase?

Will it be possible for you to accelerate your mortgage payments?

What type of work do you do and how stable are your long term employment prospects?

Do you have basic home repair skills? Could you realistically buy a fixer upper and make the repairs yourself?


Edit to add that buying is almost always a better choice than renting. That is provided you have some reasonable expectation of financial stability and do not intend to relocate in the near future. There are far more institutions and individuals invested in keeping stability in the real estate market than in any other market.

[MADem]

pardon me, double clickitis

[MADem]

7. Buy less house than your eyes tell you that you want

Something big enough for your family, but cozy, easy to heat or cool, and don't get seduced when house shopping. If it has atrium entryways or McMansion features, run away. Also, buy less house than they tell you that you can "afford." No sense in being house-poor.

[CountAllVotes]

10. yes more good advice

Small is good. Less work, lower bills, taxes, etc. etc.

After renting for years, this works out just fine! :D

:kick:

[JPZenger]

12. Buy, unless ...

It almost always make sense to buy a home, especially in a market with reasonable prices such as Rochester, unless:

- you don't intend to stay in the house for less than 3 years,
- you have bad credit, which would make you pay predatory interest rates, or
- you live in an area that is in a dangerous inflationary price bubble, and it would be better to wait until the price comes back to earth.

There are some people who don't buy because they don't want to deal with home and yard maintenance. The simple answer in that case is to by a low-maintenance condo.

[Midlodemocrat]

16. Excellent advice.

We did the same. We bought small and conservatively and added on. It has worked out beautifully. We have all the room we need with a very small mortgage.

[Nickster]

17. Be careful though. I agree with not going to nuts, but I was WAY to

cautious when I bought my first home in 2002. I was real conservative about it and kept my price well within my means, which isn't necessarily all bad, but just a few short years later and all those things I didn't know that I would want are really far out of my reach now. If I had stretched myself then, I'd still have bought a house for 45-50k less than the current average price is. I kick myself everytime thinking how I could have easily strectched another 15-20k at the initial purchase and had so many extra square feet and features. Ehhh, live and learn, live and learn.

[terryg11]

11. own if you can

interest rates will always be fluctuating, even seven or eight percent isn't bad when you think of how its building your equity.

Like some other posters have already said, don't be house poor, make sure your monthly payments are low enough where you still have money left over and possibly even pay the mortgage off faster

[CountAllVotes]

22. you are SO right!

I had to have a roof put on this house about two years ago. Cost was about $5,000 (probably about $8,000 now). Being the house is small, that was considered a low price for a 30-year guaranteed roof a couple of years ago. I'll likely be dead by the time it needs another roof, BUT there have been other costs too, like repairing the fence, fixing up the wrecked kitchen (another $7,000), etc. etc. etc. I bought a fixer upper more or less I'd say. The house was built in the late 1980s so it isn't that old but it needed a lot of work because the former owners didn't keep it up and they in fact lost the house because they couldn't make the payments.

It sold for about the same amount it sold for new in 1988 ($60,000) as the seller had to put $20,000 into it in order that it could be sold and even then, still many things needed to be done.

That is the only thing I do not like about owning a home. You simply MUST keep the property and house up if you want it to be a decent home to live in and an investment as well. And also you MUST have some money to pay for maintenance set aside.

Next: Carpets (not right away, but within the next couple of years). Hopefully it won't be too much being the square footage is small (see, small is good!).

I was not really prepared to have to come up with another $12,000++ for repairs and maintenance. This has been since 2000 though.

Considering all of it, I'm still way ahead of the game as I was paying about $6,000 a year or more in rent for almost 30 years. That adds up to $180,000. which is all in some scum lord's pocket right now and I don't even want to think of how much that $180,000 would be with interest over the 30 year period.

At least I was able to get out of the renter's trap and away from the scum lords. Timing is everything in life.

It might be wise to wait for awhile I think right now as things are highly volatile and if the housing market takes a big hit, which I believe it will with in the next few years, prices could be much lower but interest rates could be a lot higher too. :shrug:

If this person finds a deal, I'd still say go for it but be prepared for the cost of maintenance and unforeseen things happening (like plumbing problems ...). It can get very expensive very quickly.

:kick:

[Lars39]

13. Some thoughts...

Under buy so that you can set aside money for repairs and upkeep and pay extra on the principle.
Also buy with an eye to building an addition if you think you'll be squeezed in a few years.
It's often much cheaper.
And if you do plan an addition, start saving for it, don't take out a second mortgage to pay for an addition.
Just my 2 and your mileage may vary. :)

Renting also leaves you vulnerable to the owner going bankrupt. Nice cheery thought, that.

[mtnsnake]

14. Don't worry about interest rates too much. Worry about getting a good buy

If the rates go up, then eventually demand will drop and so will the price of homes. If you pay $200,000 for a home now, it might only be worth $150,000 next year if the housing market happens to plummet.

The best thing you can do is look for a good buy. Shop around, find a home you like, think it over carefully before committing, then make them a lowball offer. The main thing is to get a good buy on something in a decent location. If you do that, you can't go wrong. Too many people are willing to pay way too much for a home just because interest rates are low.

[VOX]

26. Well said. And, if the rates should fall again, refinance. n/t

[Earth_First]

18. Some great responses, thanks folks!

I'll certainly have the wife peruse this thread this evening.

[yankeedem]

19. Buying a house is ok but.......

Where I live, my apartment (3 bed) is $1,250. A mortgage for the same type house is $3,000 for tax,insurance, and payment.

Why should I buy a house, and pay for repairs, when I can take the difference between rent and the mortgage and put it in my brokerage account? In a few short years, I'll be able to buy a house with cash or pretty close to it.

[truebrit71]

28. Exactly. In an apartment when something breaks, someone ELSE pays for it..

...the taxes issue is a non-starter for me, I NEVER get any money back, even when I owned a house....plus there's no property tax to go up every single fuggin' year...

I will eventually get back into the ownership game, but right now it just doesn't make any sense....

[Gormy Cuss]

20. Not a realtor, but years of housing trend analysis.

My advice is simple: before you make the choice, read up on the pros and cons and don't buy into the "why waste money on rent?" argument, and don't buy out of fear of increasing interest rates. Housing affordability is a complex issue. When interest rates rise, fewer buyers are eligible and often house prices fall (or fail to appreciate.) When the interest rates were in the double digit, the rate of return on even modest investment instruments such as CDs was high too. People with other investments made a lot of money while the housing market tanked in some areas of the country. In short, it's very hard to make a one-size-fits-all answer on this decision. It's also very hard to game the timing on interest rates.

Here's first cut tool from Ginnie Mae to help you decide the question of own vs. rent. You can supply inputs (such as the local property tax rate) to tailor it to your current situation.
http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?Section=YPTH

On edit: remember that as a renter, if your income declines you can respond rather quickly by breaking the lease and downscaling. Try doing that with your mortgage, never mind the insurance and property taxes.

[Extend a Hand]

21. from the prophetess of doom

It is my belief that the dollar is headed for a crash and soon. The fed is about to quit publishing the M3 numbers in March 06. The Iranians (4% of world oil production) are about to start an oil bourse and requiring payment in Euros. The King of Saudi arabia is in his mid-eighties and there are many signs that transition of power will NOT go smoothly (further threatening oil security for the west). World Oil demand will soon exceed production.

Read about what happened to people in Argentina with debt when they crashed in 2000. Read about what happened here in the Great Depression.

http://dominionpaper.ca/labour/2005/08/06/after_the_.html

Where I work this morning they just did a "right-sizing" (I hate that euphemism) exercise -- more jobs to India.

We have high school and college age kids and are paying off our mortgage as fast as we can but I loose sleep worrying that it won't be fast enough.

Save, buy a piece of land and build what used to be called a "pay-day" house. That's what is still done in most of the world. Build what you can actually pay cash for.

STAY OUT OF DEBT. A MORTGAGE = DEBT.
http://deconsumption.typepad.com/deconsumption/2004/05/background_for_.html

http://www.energybulletin.net/12125.html

[mkultra]

23. Well, it depends on your outlook.

I buy real estate as investment property as well as owning my own home and here is my 2 cents.


The cost of getting into a home and then getting out of a home slows the potential for making equity from your payments.

It usually costs you about $4k just to buy a home and then it costs you 6% to sell it. If you are a standard buyer with no interest in renovating a broken house, then you need to be willing to stay in the house you buy for at least 4 years to cover your loses. Let me give an example.

Lets say your looking for a small home and you find one that is 100K at pretty much the going market rate.
lets say you have $4K in the bank. You'll drop just about every bit of that on closing costs, inspections, financing costs, starting your escrows, and so on. You'll then be in the house with a $100K mortgage without having put any money down(you may be required to have down money as well depending on your lender). Now lets continue and assume that you got a 30 year note at 7%.

At the end of 4 years, you will have paid off about $4,700 in equity. Lets also say that the value of the home has gone up to $120k and your ready to move on. You list the house and sell it for $120K. the Realtors will cost you at least 6% and closing costs to the seller will probably be about 1% which totals about $8,400. After paying the $8,400 in selling cost and the $95,300 in loan repayment, you will be left with $16,300. Subtract from that your original $4K drop and you've made $12,300.

You will of course have to pay the repairs while you live their which could include anything from a new roof to a new sewer main or basically any repairs that a home needs to stay viable.



So as you can see, in this scenario, you make about $12K over 4 years. Thats not to bad overall. for every year under 4 that you stay before your net goes down as the value of the house doesn't have time to percolate up and your principle doesn't get paid down.

If you took out a $100K loan in January of 05. Your principle balance at the end of each year would be the following:

Dec 2005 $98896.30
Dec 2006 $97800.70
Dec 2007 $96625.90
Dec 2008 $95366.18



So my advice is to keep renting unless your can stay their for a least 4 years. interests rates will be rising slightly though and the housing market does seem to be cooling a bit in some places so a jump from 100k to 120K in 4 years may not be practical in the future..


Hope that helps.

[Caution]

24. High interest rates vs Size of loan

OK, just to throw some very basic quick numbers out to you:

I'm not sure what current interest rates are but they kind of dont matter. Let's say they are currently 7% and that the house you want to buy requires a 30-year fixed rate mortgage of $350,000

over the life of that loan, assuming you make no additional early payments you will pay out a total of

$838,281.14 ($350,000 in principle and $488,281.14 in interest)

Now, say you wait for the bubble to burst so you can buy the same house at $250,000 (a burst of roughly 30%, pretty steep) but interest rates jump up to 12% you will end up paying a total of:

$925,751.34 ($250,000 in principle and $675,751.34 in interest).

Now, let's say you rent over 30 years at $1000/month with that number doubling every 10 years (it would probably go up faster than that but let's go loose with it). Total cost:

$720,000 with nothing to show for it (just money put out with no return).

The short of it is DON'T RENT if you can afford to buy. The numbers just don't make any sense for the renter if she can afford to make the initial home purchase.

[Lochloosa]

25. Buy the smallest house in the best neighborhood you can afford.

The rise in equity of all the McMansions around will bring up the value of the smallest house.

[CountAllVotes]

27. yes that is what happened to me

I live in a decent neighborhood. Lots of $500,000 homes around here no doubt. Being the property has been kept up and improved, it has worked out very well.

I live near a small airport (one negative factor). However, there are a lot less flights going in/out now luckily. I never hear the airplanes when they fly over the house being they are small ones and infrequent.

Being the airport is attracting a lot less business, this has really caused the value of the homes around here to literally skyrocket.

I like a small house and need nothing more. I have a lot of land that came with the house and it is actually worth more than the house itself!

Keep that one in mind too!

:kick:

[SoCalDem]

29. and don't "over" remodel

You can drop a TON of money into upgrades and such, but if you do, do it for YOUR comfort..not as a resale tool. Yours might sell first with all the fancy doo-dads, but you probably won't a hugely higher price over the rest in your neighborhood..

We had friends who added onto their home and put down a 25K floor.. They ended up selling for just about what everyone else in the nighborhood got when they sold.. In fact their addition probably "cost" them, because it ate up most of what used to be a big yard..

Just basic upkeep and fresh paint can do wonders when it's time to resell.and some things that you consider a bonus, will be seen as negatives to prospective buyers..

Pools for some are great, but for others with babies & toddlers, they are a deal-killer
Custom wallpaper may be expensive, but wallpaper is like clothing.. you either love it or hate it.

Some people HATE ceiling fans and might think the A/C didn;t work well if you have a ceiling fan in every room..

Even if purple is your favorite color, it's not a good carpet color :P

[MercutioATC]

31. Look at other factors like available lots, too.

My city is quickly nearing capacity. Already, there have been a couple of older houses torn down and replaced by larger ones. That was one of the considerations when I bought my house. It's only 2000 sq. ft., but it's the only house on the street that sits on a double lot (1 acre). I'm planning to retire and sell in about 10 1/2 years, which is about the time we should run out of available lots.

It certainly shouldn't be the determining factor (essentially, it's speculation) but it can contribute to the decision-making process.

[fed-up]

30. Location, Location, Location (and insulation)

How far will you have to commute to work, (factor in huge gas price increases here). Is public transportation or biking a possibility from your potential new house if you buy?

Insulation-does the house have double pane windows, are the walls/ceiling insulated? What will your energy costs be?
Can you afford to do the upgrades needed with ever increasing energy prices?

Insurance factors-are you in a wildfire, earthquake, flood zone? My insurance went from $500 a year to $1,500 (in four years) because of the wild fires in Southern California. What effect will global warming have on the area you are looking at?

What are the car insurance rates in the new neighborhood?

Will the house be on public sewer or are there plans if not for hooking up to public sewer?

If there is a well, do you have a spare $30K to replace it if need be? (depending on location/depth of well)

If there is a septic, will it need repair (new leach lines) soon?

What will happen to your property taxes if your house increases in value?
At least here in California prop taxes can only go up 1% a year thanks to prop 13 in the 1970's.

I am downsizing in the spring so that I can at least control some of my expenses and not have a huge mortgage hanging over my head.

[skids]

32. I wrestled with that a while back.

I ended up opting for renting, but it really depends on your situation.

If you can afford the mortgage, with some cash out for energy improvements, plus property tax
plus utility connection fees and a repair and emergency upkeep budget (things which most
neglect to consider) you might want to look into building some equity by buying. Especially if
you can put down enough to avoid the PMI, or at least get terms that allow you to start paying
into principle immediately, not five years down the line. Consider the odds, based on age
and condition, that any major parts of the house will need replacement -- roof, furnace, etc.

But if you have cheap rental opportunities (do consider the energy use as rental properties can
suck a pretty penny through the wall socket and out poorly insulated windows), rents are pretty much going to stay depressed in a high interest environment -- people who cannot sell in a cooling market will be in a bidding war for tenants, and converted condos will revert to rentals.