Texas Real Estate: Rent vs. Buy

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bagelhead
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Texas Real Estate: Rent vs. Buy

Post by bagelhead » Mon Oct 01, 2012 1:34 pm

Hi,

Texas has a unique real estate situation in that the housing is inexpensive, but property tax is very high (2.0-2.5%). For housing that would sell for around $400-500k, comparable rentals seem to be around $2000-2500/month. Also, most people in these nicer neighborhoods buy rather than rent, so quality single family home rentals are difficult to find.

There are a lot of calculators (NY Times, Price/Rent ratio, etc.) that consider a lot of variables (marginal tax rate, property tax, etc.). They all seem to fall within an intermediate-to-slightly-favor-renting range. Also, AMT will most likely cause a loss of the entire property tax deduction. Lastly, selling a property would be challenging at this price range in this locale.

Lots of competing variables... What are your thoughts for one who intends to stay for 20+ years (it is unlikely but possible to leave in < 5 years) and would prefer not having to possibly move every 3-5 years?

Thanks.

Random Poster
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Re: Texas Real Estate: Rent vs. Buy

Post by Random Poster » Mon Oct 01, 2012 1:57 pm

Where in Texas?

lm002e
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Re: Texas Real Estate: Rent vs. Buy

Post by lm002e » Mon Oct 01, 2012 2:06 pm

I live in Austin, TX and I'm struggling with the same decision. I lean towards buying as hedge against inflation. The austin area rental market is nearly full (~98% occupancy rate) which will most likely mean landlords will be raising the rent in the coming years.

NYBoglehead
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Re: Texas Real Estate: Rent vs. Buy

Post by NYBoglehead » Mon Oct 01, 2012 2:12 pm

The rent will go up every year. Count on it, buying a house might seem expensive now but in 3-5 years when the rent payment would have grown 15-20% over that time period (mine is up 9% just from last year) your mortgage payment will have stayed the same, and the mortgage interest/property taxes will lower your tax liability (although tracking on the AMT trap).

If you plan on staying 20+ years I see no reason not to buy right now. Interest rates are incredibly low and unlikely to go much lower.

billyt
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Re: Texas Real Estate: Rent vs. Buy

Post by billyt » Mon Oct 01, 2012 3:29 pm

The NYT rent-buy calculator takes future rent increases into account in its analysis. If it says that it is cheaper to rent, then it is, given the parameters you have set. On a $500,000 mortgage you will pay $300,000 in interest. That is a big hurdle to overcome. Do the math.
You have to decide if the advantages of being an owner are worth the premium over renting.

Billyt

Firewood42
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Re: Texas Real Estate: Rent vs. Buy

Post by Firewood42 » Mon Oct 01, 2012 6:17 pm

We rent a villa in South Texas near South Padre Island on a golf course with free golf for $2000 a month for two months, January and February. I can't see ever buying a place down there with taxes and upkeep so high.

livesoft
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Re: Texas Real Estate: Rent vs. Buy

Post by livesoft » Mon Oct 01, 2012 6:24 pm

The prop taxes are less than similar size homes in NY, California, elsewhere. So don't go by house price. Go by sq ft of living space and lot size.
Here's a home similar to ours: http://www.zillow.com/homedetails/12272 ... 8023_zpid/
But in Texas our prop taxes are much, much less. Plus our home is about 1/3rd the price.

Don't buy TX real estate to make a killing. Buy it to live in.
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dotnet
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Re: Texas Real Estate: Rent vs. Buy

Post by dotnet » Mon Oct 01, 2012 7:50 pm

You have the potential of living rent free (plus taxes) if you buy a house and live/stay long enough.

billyt
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Re: Texas Real Estate: Rent vs. Buy

Post by billyt » Tue Oct 02, 2012 11:03 am

There are many good reasons to prefer owning over renting, but living 'rent free' is generally not one of them. Many people prefer to own, which often makes the cost of owning higher than renting. You really have to do the math to understand the cost of owning. Comparing the mortgage payment to the rent doesn't tell you much. Separate the cost analysis into two parts, the cost of financing and the cost of the house. The cost of the financing is the interest rate on the mortgage. Here you are making a bet about future inflation. Roughly speaking you will come out ahead on the financing if the inflation rate is larger than the interest rate (the price appreciation on the house is more than the interest paid), if not, you will lose money in real terms. The costs of the house itself is a bigger concern. You will spend about 10% of the house price in transaction costs (buying and selling). Then there is the opportunity cost, the money you would otherwise earn on the money invested in the house, conservatively 5% annual. Finally, there are taxes, insurance and maintenance. If taxes alone are 2.5%, then TIM is likely to be 4-5%. So for a $500,000 house you will pay 50k in transaction costs, $2,500 annually if you stay put for 20 years. Opportunity cost and TIM are roughly 10% a year or $50,000. So that $500,000 house that you can rent for $30,000 a year will cost you $52,500 a year to own. This expense continues forever, even if the house is paid off. Yes, rents will increase with inflation, but so will TIM and opportunity costs. People often prefer to own if they can afford it, but it is often more expensive than renting. Buy a house if that's what you want, just don't kid yourself that you are saving money.

Billy T

Batousai
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Re: Texas Real Estate: Rent vs. Buy

Post by Batousai » Tue Oct 02, 2012 3:52 pm

Unless you believe you can find a property owner who is going to run a charity by renting to you (i.e. under an efficient market value), then it will probably be cheaper to own if you plan on staying in it long term.

That being said, there is more to rent vs own than just cost. Renting affords you to be able to move if you want much easier. Renting is cheaper if you move often as there are large costs (6%+) to selling a house. You won't have a spike in repair costs, or own tools like a lawn mower.

Owning a house also has it's advantages. Like being able to do almost what ever the hell you want to the place without asking anyone's permission. There can be tax advantages, such as homestead exemptions (small fixed amount of the house's value is not taxed for someone's primary home) and morgage interest deduction. These are not avaliable to the people who rent houses, so it is a cost they bear that you wouldn't. And again, they are still trying to make money on the deal on top of it.

And a note about the price of homes in Texas. Depending on where you want to live, 500K is an insane price in Texas. Unless you want to live "inside the loop" (Most texas cities have a highway loop around the city), i.e. close to or downtown, 500K is going to buy you a mansion. Suburbs (45 mins from down town) can give you brand new quality homes in the 3000s qft range for the 225-300 ball park depending on how much land you want with it.

mrspremise
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Re: Texas Real Estate: Rent vs. Buy

Post by mrspremise » Tue Oct 02, 2012 3:54 pm

billyt wrote:You will spend about 10% of the house price in transaction costs (buying and selling).
Generally the transaction costs are going to be on the selling side, not the buyers side, since the selling and buying agent usually split the commission. Typically this is up to 6%. There's going to be settlement fees, but those vary a lot by region and need to be looked into individually.
billyt wrote:Then there is the opportunity cost, the money you would otherwise earn on the money invested in the house, conservatively 5% annual. Finally, there are taxes, insurance and maintenance. If taxes alone are 2.5%, then TIM is likely to be 4-5%. So for a $500,000 house you will pay 50k in transaction costs, $2,500 annually if you stay put for 20 years. Opportunity cost and TIM are roughly 10% a year or $50,000.
Maybe I'm missing something, but the opportunity cost is only relevant for the amount you're putting towards the house in a year ABOVE what you would have paid in rent since you can't presumably stop paying rent and invest it instead. Based on how the calculators came out as only slightly favoring rent I would assume it's a small amount you're paying in opportunity cost. It seems you're calculating opportunity cost on the entire value of the house, which only makes sense if someone had 500k that they would have invested but instead bought a house with it.

It still might be a slightly better deal in economic terms to rent (completely ignoring psychological effects, better selection, etc), but it's important to get the math right.

Not sure if it matters to you, but Texas homestead act is a little unique. It's not easy to take out a home equity loan, but it's also really hard for a creditor to take your home from you.

lws6772
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Re: Texas Real Estate: Rent vs. Buy

Post by lws6772 » Tue Oct 02, 2012 4:01 pm

dotnet wrote:You have the potential of living rent free (plus taxes) if you buy a house and live/stay long enough.
And that is one of the best feelings in the world, talk about stress free! :D

taurabora
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Re: Texas Real Estate: Rent vs. Buy

Post by taurabora » Tue Oct 02, 2012 4:06 pm

I'm in Houston, struggling with this same problem. My rent has been increasing at 10% per year, though, so that is really pushing me towards buying.

cmanion
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Re: Texas Real Estate: Rent vs. Buy

Post by cmanion » Tue Oct 02, 2012 5:32 pm

I'm in El Paso. With BRAC and the thousands of extra soldiers coming to Fort Bliss, the housing and rental market has stayed pretty steady. We bought brand new in 2008 and plan to move in the next couple of years. To be honest, even if I break even when we sell it I love the feeling that I can do what I want, when I want. Rentals in our house size are drawing roughly the monthly rent as our mortgage anyway.

When we move to Dallas we plan on doing the same thing as the OP, buy a house that we will live in for the next 20+ years. I'm very happy with what I'm seeing on real estate sites, so I hope the same options will be available in the near future.

billyt
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Re: Texas Real Estate: Rent vs. Buy

Post by billyt » Wed Oct 03, 2012 7:14 am

mrspremise: Closing costs for the buyer do vary widely, but 4% of the house price is not an unreasonable number. In the final analysis, this is a very small part of the total cost. Neglect it if you like. The opportunity cost is a serious matter, and one that is frequently neglected, because it is 'hidden' by the financing. Generally speaking, the least expensive way to own a home is to pay cash for it, unless you are lucky enough to win the speculative bet that your interest costs will be less than inflation over the life of your mortgage. In the case of paying cash, the cheapest way to go, it is very clear that the opportunity cost is on the full price of the home, and has nothing to do with the cost of renting. In the case of the mortgage, it is more complicated because your opportunity costs increase year by year as you pay down your mortgage, but the total costs are likely to be higher because of the cost of borrowing.

Billyt

billyt
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Re: Texas Real Estate: Rent vs. Buy

Post by billyt » Wed Oct 03, 2012 8:02 am

After a careful look at the NYT buy-rent calculator, I see that I am mistaken. Opportunity cost must also be calculated on the rental payments. I have learned something. In addition to the bet on inflation, which favors buying, there is also the consideration of return on investment. If you think that you can earn more on your portfolio than the interest rate on the loan, it will be cheaper to borrow the money than not. It costs you money to pay in full in this case.

Billyt

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Phineas J. Whoopee
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Re: Texas Real Estate: Rent vs. Buy

Post by Phineas J. Whoopee » Wed Oct 03, 2012 2:31 pm

mrspremise wrote: Generally the transaction costs are going to be on the selling side, not the buyers side, since the selling and buying agent usually split the commission. Typically this is up to 6%. There's going to be settlement fees, but those vary a lot by region and need to be looked into individually.
...
Hi mrspremise,

In my one and only experience buying a home, which was not in Texas, I found it notable that every dollar which changed hands came from me. Perhaps I am looking at it the wrong way, but everybody who got paid anything, including the seller and the governments (state plus local), was paid out of the money my lender and I brought to the closing table.

I'd be happy to be educated to the contrary (prior to any future experience I might eventually have as a seller!).

PJW

new2bogle
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Re: Texas Real Estate: Rent vs. Buy

Post by new2bogle » Wed Oct 03, 2012 10:18 pm

I'm in Austin and a landlord of one house. Market value is ~$290k and I get ~2100/month. I am +$400 profit every month. So far working very well for me.

mrspremise
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Re: Texas Real Estate: Rent vs. Buy

Post by mrspremise » Thu Oct 04, 2012 11:13 am

Phineas J. Whoopee wrote:
mrspremise wrote: Generally the transaction costs are going to be on the selling side, not the buyers side, since the selling and buying agent usually split the commission. Typically this is up to 6%. There's going to be settlement fees, but those vary a lot by region and need to be looked into individually.
...
Hi mrspremise,

In my one and only experience buying a home, which was not in Texas, I found it notable that every dollar which changed hands came from me. Perhaps I am looking at it the wrong way, but everybody who got paid anything, including the seller and the governments (state plus local), was paid out of the money my lender and I brought to the closing table.

I'd be happy to be educated to the contrary (prior to any future experience I might eventually have as a seller!).

PJW
Who pays closing costs/settlement fees which is a whole suite of fees related to financing and legal fees and whatnot could be negotiated potentially in the right kind of market (sort of an alternate way of getting a price cut on the house), but yes that's typically the buyer by default. The sales commission for the selling agent, however, is generally a percentage of the sale as the term commission implies. Technically the money is coming from the buyer (they're buying the house after all), but it comes out of the price of the house, so effectively the seller is winding up with that much less in their pocket from the sale of the home. When there is a buyer agent, they split the commission with the selling agent. I'm pretty sure this is not a Texas specific thing, but I think it's not really a transaction that's obvious to the buyer so maybe that's why you didn't realize? I've only been on the buying end, not selling, so I couldn't tell you how the commission is settled.

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Phineas J. Whoopee
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Re: Texas Real Estate: Rent vs. Buy

Post by Phineas J. Whoopee » Fri Oct 05, 2012 5:47 pm

mrspremise wrote:
Phineas J. Whoopee wrote:
mrspremise wrote: Generally the transaction costs are going to be on the selling side, not the buyers side, since the selling and buying agent usually split the commission. Typically this is up to 6%. There's going to be settlement fees, but those vary a lot by region and need to be looked into individually.
...
Hi mrspremise,

In my one and only experience buying a home, which was not in Texas, I found it notable that every dollar which changed hands came from me. Perhaps I am looking at it the wrong way, but everybody who got paid anything, including the seller and the governments (state plus local), was paid out of the money my lender and I brought to the closing table.

I'd be happy to be educated to the contrary (prior to any future experience I might eventually have as a seller!).

PJW
Who pays closing costs/settlement fees which is a whole suite of fees related to financing and legal fees and whatnot could be negotiated potentially in the right kind of market (sort of an alternate way of getting a price cut on the house), but yes that's typically the buyer by default. The sales commission for the selling agent, however, is generally a percentage of the sale as the term commission implies. Technically the money is coming from the buyer (they're buying the house after all), but it comes out of the price of the house, so effectively the seller is winding up with that much less in their pocket from the sale of the home. When there is a buyer agent, they split the commission with the selling agent. I'm pretty sure this is not a Texas specific thing, but I think it's not really a transaction that's obvious to the buyer so maybe that's why you didn't realize? I've only been on the buying end, not selling, so I couldn't tell you how the commission is settled.
Thanks mrspremise,

I do understand about the seller's commission (and how the sharing of it turns a "buyer's agent" into, in fact, an agent for the seller, in terms of who that agent's duties apply to).

It seemed to me that, just as I factored closing costs into my buying decision, the seller must have factored the commission into the selling decision.

I was simply impressed by the fact that, for all the talk of who was paying for what, every dollar which crossed the table came out of my accounts (including my brand new opened-at-closing mortgage account). If I'd thought about it beforehand it wouldn't have made such an impression.

I don't think we're in disagreement.

PJW

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Cosmo
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Re: Texas Real Estate: Rent vs. Buy

Post by Cosmo » Sat Oct 06, 2012 3:56 am

bagelhead wrote:Hi,

Texas has a unique real estate situation in that the housing is inexpensive, but property tax is very high (2.0-2.5%). For housing that would sell for around $400-500k, comparable rentals seem to be around $2000-2500/month. Also, most people in these nicer neighborhoods buy rather than rent, so quality single family home rentals are difficult to find.

There are a lot of calculators (NY Times, Price/Rent ratio, etc.) that consider a lot of variables (marginal tax rate, property tax, etc.). They all seem to fall within an intermediate-to-slightly-favor-renting range. Also, AMT will most likely cause a loss of the entire property tax deduction. Lastly, selling a property would be challenging at this price range in this locale.

Lots of competing variables... What are your thoughts for one who intends to stay for 20+ years (it is unlikely but possible to leave in < 5 years) and would prefer not having to possibly move every 3-5 years?

Thanks.
Your rental comps seem quite low for the Houston area. Here in the Woodlands, a 320k house is presently renting for $2,800/mo. Probably more typical for this price range is $2,500/mo.

Cosmo

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Epsilon Delta
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Re: Texas Real Estate: Rent vs. Buy

Post by Epsilon Delta » Sat Oct 06, 2012 2:36 pm

Phineas J. Whoopee wrote: It seemed to me that, just as I factored closing costs into my buying decision, the seller must have factored the commission into the selling decision.
Once you own the house you've committed yourself (or your estate) to the selling commission, so you really should consider it before you buy rather than before you sell.

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Phineas J. Whoopee
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Re: Texas Real Estate: Rent vs. Buy

Post by Phineas J. Whoopee » Sun Oct 07, 2012 7:20 pm

Epsilon Delta wrote:
Phineas J. Whoopee wrote: It seemed to me that, just as I factored closing costs into my buying decision, the seller must have factored the commission into the selling decision.
Once you own the house you've committed yourself (or your estate) to the selling commission, so you really should consider it before you buy rather than before you sell.
:!:

PJW

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rustymutt
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Re: Texas Real Estate: Rent vs. Buy

Post by rustymutt » Sun Oct 07, 2012 8:08 pm

We thought about moving to Texas for retirement. Then we looked at some homes in the Dallas area and got shocked at the property taxes. They have no income tax in Texas, but get you elsewhere.
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