Renting cheap apartment vs. buying house for growing family
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Renting cheap apartment vs. buying house for growing family
My wife and I and two infants live in a major city in Central Florida and currently rent a 2/2 apartment for 1,000 a month. We are currently content with this arrangement as the apartment is in a nice community, includes modern upgrades, and our children are not of school age. However, in the next 1-3 years we are looking to purchase our first home in a suburban community with good schools. We will likely spend between 250k and 300k and will consider this our "forever house." Please note that property insurance and taxes are outrageous in Florida and continue to grow every year.
People are constantly encouraging me to buy sooner rather than later. I personally believe housing prices will still fall, but this is not the reason I have cold feet on this issue. The reason I believe it is still in our best interest to rent is because renting is cheaper than owning, and that by renting, I have thousands of dollars available each month to save for a downpayment, pay off school loans, and fund retirement savings.
Simply put, I believe we are currently under-consuming housing. By renting a smaller and cheaper place than we will ultimately buy, we are saving money each month and actually making a more boglehead-ish decision. My personal belief is that housing can be a store of wealth in the long run, but it is principally a consumption item, and the less you consume the better off you will be financially.
This is not a standard rent vs. buy thread. I would appreciate people's thoughts on my reasoning, and, if you're so inclined, your opinion on the best path for a young family at this point in life. I personally see little risk in continuing to rent for a few years as I do not believe housing prices in Florida are going anywhere but down. Further, based on the above, I believe that the longer we "hold out" with a cheap apartment before eventually plunging into homeownership, the better off we will be.
Thanks!
People are constantly encouraging me to buy sooner rather than later. I personally believe housing prices will still fall, but this is not the reason I have cold feet on this issue. The reason I believe it is still in our best interest to rent is because renting is cheaper than owning, and that by renting, I have thousands of dollars available each month to save for a downpayment, pay off school loans, and fund retirement savings.
Simply put, I believe we are currently under-consuming housing. By renting a smaller and cheaper place than we will ultimately buy, we are saving money each month and actually making a more boglehead-ish decision. My personal belief is that housing can be a store of wealth in the long run, but it is principally a consumption item, and the less you consume the better off you will be financially.
This is not a standard rent vs. buy thread. I would appreciate people's thoughts on my reasoning, and, if you're so inclined, your opinion on the best path for a young family at this point in life. I personally see little risk in continuing to rent for a few years as I do not believe housing prices in Florida are going anywhere but down. Further, based on the above, I believe that the longer we "hold out" with a cheap apartment before eventually plunging into homeownership, the better off we will be.
Thanks!
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Re: Renting cheap apartment vs. buying house for growing fam
Are you comparing rent on your cheap apt vs. housing costs on the upgrade? Or is it apples-to-apples, what you would pay to rent the upgrade vs. housing costs on the upgrade? My family recently bought a condo in Orlando to house my younger brother because rents are 10-15% of property values, making it much cheaper to own than rent. In their case, since it was a foreclosure sale, the rent is nearly 20% of the property value.The Dude Abides wrote:My wife and I and two infants live in a major city in Central Florida and currently rent a 2/2 apartment for 1,000 a month... The reason I believe it is still in our best interest to rent is because renting is cheaper than owning, and that by renting...
It would be good to quantify your statement that your rent is cheaper than owning with some accurate numbers. If you did your own taxes with tax software like turbo tax then you can make dummy copies of your tax returns and run the numbers as if you had owned a house last year. When you add in all the insurance, property taxes, and maintenance costs you also need to also remember to subtract out the part of each months mortgage payment that is paying down the principal each month. For example if you have a $1,000 mortgage payment and $800 of that is interest, then $200 is paying down principal so over the year your net worth would increase by $2,400 (200*12) so that would have to be adjusted for to make it a fair comparison.
When you buy a house with a mortgage you are really buying two things, a building and the use of a big chunk of money for a long time. I don't know what will happen with the house prices but right now interest rates are at a historic low and you can get 30 year fixed rate mortgage in the low 4% range or even lower if you pay some additional points. With the tax deduction this likely has an after tax effective rate of somewhere in the mid to low 3% range. The truly amazing thing is that inflation is running around 3.6% so in effect you can borrow money at around a 0% real interest rate. The problem is that even if you are able to successfully wait and buy after prices have gone down some more, the mortgage interest rates could go up so and more than offset the price reduction.
My opinion is that the low interest rates are likely due to all the stimulus and quantative easing so this is a very unusual opportunity. For perspective as recently as 2000 mortgage interest rates were over 8%
Since this will be your "forever" house it is much more better(within reason) to find a great house at an Ok price then a "just OK" house at a great price.
Given that you said that you would be buying in 1 to 3 years then I would start looking a now and if you find "super fantastic" house for the price then go ahead and buy it now.
Next year you could buy if you find a "really good house", then the year after that you could settle for a just a "good house"
When you buy a house with a mortgage you are really buying two things, a building and the use of a big chunk of money for a long time. I don't know what will happen with the house prices but right now interest rates are at a historic low and you can get 30 year fixed rate mortgage in the low 4% range or even lower if you pay some additional points. With the tax deduction this likely has an after tax effective rate of somewhere in the mid to low 3% range. The truly amazing thing is that inflation is running around 3.6% so in effect you can borrow money at around a 0% real interest rate. The problem is that even if you are able to successfully wait and buy after prices have gone down some more, the mortgage interest rates could go up so and more than offset the price reduction.
My opinion is that the low interest rates are likely due to all the stimulus and quantative easing so this is a very unusual opportunity. For perspective as recently as 2000 mortgage interest rates were over 8%
Since this will be your "forever" house it is much more better(within reason) to find a great house at an Ok price then a "just OK" house at a great price.
Given that you said that you would be buying in 1 to 3 years then I would start looking a now and if you find "super fantastic" house for the price then go ahead and buy it now.
Next year you could buy if you find a "really good house", then the year after that you could settle for a just a "good house"
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My guess is that your house will have a mortage of roughly $2000 per month. Your current rent is $1000 per month.
That's a total savings of $12,000 per year by renting rather than buying. That's a significant amount. If you keep renting for five years, that's $60,000 dollars you have saved.
Renting below your means is almost always a better decision than buying, strictly in a financial sense.
You should treat housing as a consumable item, and if you desire to have a house for lifestyle reasons (and you can afford it), then buy the house. But on a purely financial level, it's always better to live below your means and use those savings and invest them in your portfolio.
That's a total savings of $12,000 per year by renting rather than buying. That's a significant amount. If you keep renting for five years, that's $60,000 dollars you have saved.
Renting below your means is almost always a better decision than buying, strictly in a financial sense.
You should treat housing as a consumable item, and if you desire to have a house for lifestyle reasons (and you can afford it), then buy the house. But on a purely financial level, it's always better to live below your means and use those savings and invest them in your portfolio.
I own a property in Central Florida (south of Sebring) and though it dropped substantially before I bought it, it dropped substantially more afterwards. I needed to buy a place, since I sold one in Naples (at a large profit) just before. I don't believe prices are going to make any dramatic moves.
That said, NO ONE really knows where real estate prices are going. I've heard forecasts that Florida has enough excess inventory for years. Yet, I've also heard that Fort Myer, which was one of the hardest hit areas, is increasing in price.
You can rent reasonably in areas with good schools. The big unknown, besides home prices, is mortgage rates. Once they start going up, and eventually they will, what effect that has on home prices is also unknown.
No easy decision. Owning your own home, while your children are young, is an intangible. That of course is a personal choice.
That said, NO ONE really knows where real estate prices are going. I've heard forecasts that Florida has enough excess inventory for years. Yet, I've also heard that Fort Myer, which was one of the hardest hit areas, is increasing in price.
You can rent reasonably in areas with good schools. The big unknown, besides home prices, is mortgage rates. Once they start going up, and eventually they will, what effect that has on home prices is also unknown.
No easy decision. Owning your own home, while your children are young, is an intangible. That of course is a personal choice.
Re: Renting cheap apartment vs. buying house for growing fam
The correct housing costs are not the out-of-pocket costs, but the costs which are subtracted from your net worth. If you pay $1000 for rent, you don't have anything at the end of the month to show for it. If you have a mortgage and pay $300 in taxes, $700 in interest, and $500 in principal, then at the end of the month, you still own the house and you now owe the bank $500 less, so your net worth decreased by $1000 (and less because the taxes and interest are deductible.) One way to see the difference is that eventually the mortgage will be gone, and then you will have a house you can rent to yourself for free.The Dude Abides wrote:The reason I believe it is still in our best interest to rent is because renting is cheaper than owning, and that by renting, I have thousands of dollars available each month to save for a downpayment, pay off school loans, and fund retirement savings.
However, this is a good argument for renting; if you do not need more expensive housing now, there is no point in paying extra now to get it.Simply put, I believe we are currently under-consuming housing. By renting a smaller and cheaper place than we will ultimately buy, we are saving money each month and actually making a more boglehead-ish decision.
The counterargument is a risk argument. If you plan to live in the house forever, you reduce your risk by buying it. If housing prices go up before you buy the house, you will have to pay more or buy a less desirable house. If housing prices go down after you buy the house, it doesn't matter as much because you are not selling the house; you are relying on the house to cover your housing expenses, which is exactly what it does.
I live in East Central Florida and I pay $1K a month between my property taxes and home insurance. The longer you can rent, the better off you will be. You will know when it is time to buy when your apartment just feels too crowded. I don't think prices are going up anytime soon.
I bought my house in 1997 and the current value barely exceeds what I paid then. I just received my property tax bill and it increased from $4300 to over $5K - (then there is the garbage collection for another $600). The appraised/market value has gone down a lot over the last 4 years.
I bought my house in 1997 and the current value barely exceeds what I paid then. I just received my property tax bill and it increased from $4300 to over $5K - (then there is the garbage collection for another $600). The appraised/market value has gone down a lot over the last 4 years.
If you buy now, in 30 years your mortgage would be paid off and you will be living "rent free" sooner rather than later. I would get together a good down payment (20%) as soon as possible, keep an eye on these historic interest rates, and really do your home work as to what type of house you want, what streets are nice, and what are good value prices. You'll know when the right house at a great price comes along the more research you do.
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A home is a lousy investment
http://online.wsj.com/article/SB1000142 ... 41888.html
"So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."
Again, think of a house as an investment in a lifestyle, but not financially.
http://online.wsj.com/article/SB1000142 ... 41888.html
"So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."
Again, think of a house as an investment in a lifestyle, but not financially.
I agree with this - and the comments emphasizing the need to compare applesNathan Drake wrote: Renting below your means is almost always a better decision than buying, strictly in a financial sense.
You should treat housing as a consumable item, and if you desire to have a house for lifestyle reasons (and you can afford it), then buy the house. But on a purely financial level, it's always better to live below your means and use those savings and invest them in your portfolio.
We are in a similar situation - younger family in a 2 bedroom apartment
I've run a number of the online rent/buy calculators with different inputs and have come to the conclusion that in the majority of scenarios:
1. Buying a home is cheaper than renting THE EXACT SAME HOME
2. Buying a home is more expensive than renting a smaller apartment
The situation is that you would probably buy a house with a couple more rooms than you have now and have a yard to take care of. The monthly payment, taxes, and maintenance and all that would cost more than renting. Subtract from those costs the amount going to the principal and you will find out at what point you are gaining more/losing less from buying. In other words is the net loss of buying less painful than the net loss of renting. That's the calculation.
I call BULLSH*T on this "analysis!Nathan Drake wrote:A home is a lousy investment
http://online.wsj.com/article/SB1000142 ... 41888.html
"So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."
Again, think of a house as an investment in a lifestyle, but not financially.
http://www.census.gov/hhes/www/housing/ ... alues.html
First, the 1980 median price home was $47,200 in all the US, so your 20% down is $9,440 more than 50% less than the authors calculations which would wipe out about 50% of the "reported gain".
Second, oh hell, why even go further when this is such a sloppy piece of "analysis"?
Look, if you don't want to buy a home, fine. If you don't think that you are smarter and can do at least better that 50% of the average home buying Joe's then you SHOULD rent.
But, if you want to see if buying might make financial sense for you run the numbers for properties that you might purchase, Do NOT go using numbers from Detroit. etc. when you are buying in San Francisco.
It's slowly dawned on me that we won the real estate lottery!
But that median-priced house was in CA. I paid over $100k in 1977 for a nice middle class house in CA, nothing fancy (my larger house in PA had sold for $40k). By 1980, it's value had increased. I don't know where you find the median house price for CA in 1980, but I doubt it was $47,200. Double that might be close to accurate based on my own experience moving from PA to CA (I paid closer to three times as much).
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You hit the nail on the head.og15F1 wrote:I agree with this - and the comments emphasizing the need to compare applesNathan Drake wrote: Renting below your means is almost always a better decision than buying, strictly in a financial sense.
You should treat housing as a consumable item, and if you desire to have a house for lifestyle reasons (and you can afford it), then buy the house. But on a purely financial level, it's always better to live below your means and use those savings and invest them in your portfolio.
We are in a similar situation - younger family in a 2 bedroom apartment
I've run a number of the online rent/buy calculators with different inputs and have come to the conclusion that in the majority of scenarios:
1. Buying a home is cheaper than renting THE EXACT SAME HOME
2. Buying a home is more expensive than renting a smaller apartment
The situation is that you would probably buy a house with a couple more rooms than you have now and have a yard to take care of. The monthly payment, taxes, and maintenance and all that would cost more than renting. Subtract from those costs the amount going to the principal and you will find out at what point you are gaining more/losing less from buying. In other words is the net loss of buying less painful than the net loss of renting. That's the calculation.
Here it is again.sscritic wrote:But that median-priced house was in CA. I paid over $100k in 1977 for a nice middle class house in CA, nothing fancy (my larger house in PA had sold for $40k). By 1980, it's value had increased. I don't know where you find the median house price for CA in 1980, but I doubt it was $47,200. Double that might be close to accurate based on my own experience moving from PA to CA (I paid closer to three times as much).
http://www.census.gov/hhes/www/housing/ ... alues.html
CA is $84,500. But we're talking about a house in Central Florida! Mr. Bridges also doesn't seem to account for the rent increases in CA. I know of areas where rents more than tripled during that time!
I would also wonder how many people did 20% down in the 80's? That was a time of creative financing. My 1978 Honolulu purchase was with less than 6% down, typical at the time. My 1986 CA purchase of a $86,000 property was accomplished with only $5,000. That was FHA so not an uncommon amount.
I was investing in real estate for 16 years before I ever commited 20% of my money for a purchase.
It's slowly dawned on me that we won the real estate lottery!
You have your answer right here.We are currently content with this arrangement as the apartment is in a nice community, includes modern upgrades, and our children are not of school age.
The right time for a home is when you are ready for a home and can afford it. Since you are a boglehead I assume you don't believe you can time either the bottom of the housing market or the bottom of the interest rate curve. Either (or both) of those could move in your favor or against you in the next 1-3 years, but as long as you remain alert you won't miss out. Start shopping now, casually - you can learn a lot about what you are really looking for by taking your time, and maybe something too good to pass up will cross your path. If market conditions turn against you, start searching in earnest. Otherwise keep building your down payment. You're in a good situation.
If you don't buy now, but continue to invest and save, then you will be living "rent free" sooner rather than later. We found that we could afford a 100% down payment easily when we finally were ready to buy a house. Even if you cannot put 100% down, you will probably be able to do more than 20% and if you desire, finish off the mortgage well before 30 years is up.PaddyMac wrote:If you buy now, in 30 years your mortgage would be paid off and you will be living "rent free" sooner rather than later.
This is a poor analysis, because the home produces something of value; if you own a home, it provides you with living quarters that you would otherwise have to rent. (More often, this error is made in the other direction, computing a stock return without dividends.)Nathan Drake wrote:A home is a lousy investment
http://online.wsj.com/article/SB1000142 ... 41888.html
"So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
A home is a good thing to buy as long as you don't view it as an investment. However, it is a poor investment for reasons unrelated to return: high maintenance costs, illiquidity, high transaction costs, poor diversification, and indivisibility. If you are looking for an investment in real estate, you are better off with a REIT fund (in your 401(k) or IRA; otherwise, the taxes give the fund very high holding costs).
I didn't read all the replies, but I think you would be just fine renting for several years. If prices go up they will not be going up that fast. I don't think you are missing any boat if you wait a few years or more.
It sounds like you are happy renting and it is what you want to do anyway, so continue doing it. You are good either way.
Good Luck!!!
It sounds like you are happy renting and it is what you want to do anyway, so continue doing it. You are good either way.
Good Luck!!!
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I agree that it would be difficult to time the bottoms of either. However, I am not sure that predictions of direction of either real estate prices or interest rates at a given time is inconsistent with the Boglehead philosophy. Therefore timing a house purchase (or choosing not to purchase at a given time based on such predictions) could be very reasonable in my mind.epilnk wrote:Since you are a boglehead I assume you don't believe you can time either the bottom of the housing market or the bottom of the interest rate curve.
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At an intellectual level, I'd rather buy when interest rates are sky high so I can buy at a lower price and then refinance as rates drop.riskreward wrote:Lock in the historically low interest rates. Buy now.
But this requires some pretty long term timing -- possibly waiting for 15-30 years before satisfying your home ownership itch. Not many people have the discipline to do that. (Hell, I caved myself.)
Just buy when it makes sense and it's not a strain on your finances.
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Everyone: I appreciate the collective wisdom.
To respond to an issue that arose in many of the replies, yes, it is apples to oranges in that I am not pondering whether renting a similar sized home is cheaper than buying that home. For now, we are content renting a much smaller, cheaper place than what are next house will likely be.
I also particularly the advice to save money, get preapproved, watch the market, and wait. My lack of nervousness in continuing to rent comes down to the fact that we could probably pull the trigger in a 2-3 month timeframe if we prices or rates unexpectedly began soaring. This removes a lot of the risk.
I also forgot to mention in my original post that moving to the suburban home will lead to a much longer commute which I am willing to take on for the sole reason of having my children attend a better school, but is something that I would like to put off for quality of life reasons for as long as possible. We also continue to toy with the idea of living in the city, and therefore, we are not even 100% decided where we are going to buy. This all contributes to timidity in jumping in. Again, I apologize for failing to mention these additional facts. If it was a borderline decision anyway, you see how these additional factors tip the scales in favor of staying put.
To respond to an issue that arose in many of the replies, yes, it is apples to oranges in that I am not pondering whether renting a similar sized home is cheaper than buying that home. For now, we are content renting a much smaller, cheaper place than what are next house will likely be.
I also particularly the advice to save money, get preapproved, watch the market, and wait. My lack of nervousness in continuing to rent comes down to the fact that we could probably pull the trigger in a 2-3 month timeframe if we prices or rates unexpectedly began soaring. This removes a lot of the risk.
I also forgot to mention in my original post that moving to the suburban home will lead to a much longer commute which I am willing to take on for the sole reason of having my children attend a better school, but is something that I would like to put off for quality of life reasons for as long as possible. We also continue to toy with the idea of living in the city, and therefore, we are not even 100% decided where we are going to buy. This all contributes to timidity in jumping in. Again, I apologize for failing to mention these additional facts. If it was a borderline decision anyway, you see how these additional factors tip the scales in favor of staying put.
90% sure on indexing. Still thinking about buying duplexes though.
I can't help but think that if interest rates increase then housing prices will have to adjust accordingly by decreasing since it seems most people base housing "affordability" on the monthly payments they will have to make. Since increased rates would increase the monthly payments, wouldn't that make housing less affordable?Watty wrote:
My opinion is that the low interest rates are likely due to all the stimulus and quantative easing so this is a very unusual opportunity. For perspective as recently as 2000 mortgage interest rates were over 8%
Just things that go through my head, not that they're right. . .
"I would rather die with money, than live without it...." - Bogleheads member Ron |
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A time to EVALUATE your jitters https://www.bogleheads.org/forum/viewtopic.php?p=1139732#p1139732
...or prices will jump dramatically because people who have sat on the sidelines will fear being priced out and once rates reach a certain level new buyers will be forced to buy less house because of the higher interest rates .bmelikia wrote: I can't help but think that if interest rates increase then housing prices will have to adjust accordingly by decreasing since it seems most people base housing "affordability" on the monthly payments they will have to make. Since increased rates would increase the monthly payments, wouldn't that make housing less affordable?
Just things that go through my head, not that they're right. . .
It's slowly dawned on me that we won the real estate lottery!