Buying cost vs renting (specifically for me)... can anyone fact check this?

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YoungBoglehead
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Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Wed Jun 14, 2017 8:26 pm

Hey All,

I recently made a thread about the idea of me buying a home. If you're really bored and in the mood, you can read all the details here (more important details on page 2) viewtopic.php?f=2&t=220495

However I have a different question. Basically, I'm renting a home now that will be about $2,500/month after an upcoming lease renewal. I'm considering buying a $800,000 home and trying to understand the "true cost"

I'm going to quote someone from the other thread and basically ask you guys if his math checks out? Because if it does, this person is saying I'll gain $3,333~ish in net worth every month if I buy the home. It would probably cost me $4,500 or so/month out of pocket, but honestly that means my true cost would be about $1,167/month. That's HALF what I'm paying in rent. Of course a lot of that "net worth" I can't touch for a long time and there are some assumptions but still, if it's even CLOSE to accurate I'd be extremely happy and excited to buy.

That sounds too good to be true.

Does his logic add up?


Even at your lower expected income, you're well within lenders' guidelines and common sense for the debt-to-income ratio for buying the home.

Lenders typically will allow up to 28% of your gross income toward the total housing expenses including the mortgage plus taxes and insurance. And all of your debt obligations including consumer debts, student loans, etc. along with the housing expenses can typically be up to about 36% of your income before they start looking more closely at your budget.
  • For a home selling for $800,000 with 20.% down ($160,000) the balance would be $640,000. Perhaps 1.5% closing costs ($9,600) makes a total of $169,600 due at closing.

    At perhaps 4.25% for 30 years the payment for P&I would be $3148 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($1000 escrow per month) would give you a total payment of $4,482 per month.

    Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $667 per month you'd need to be able to set aside. That's a total of about $5,148 per month to own the home, and that's before you heat it cool it and furnish it.

    At about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, that would require an income of about $16,006 per month, $192,075 per year to qualify for the loan. At a more conservative 25% of income that a lot of folks recommend, you'd need to have at least $215,124 per year income.

    The interest on $640,000 at 4.25% for 30 years will be $26,991 in the first 12 months. That's $2,249 per month. The interest alone is about as much or more as I seem to recall seeing that you're paying for rent (in another thread).

    Property taxes at perhaps 1.% of the value of the home will be around $667 per month.

    Insurance at a wild guess of 0.5% of the value of the home would be $333 per month, making the total out of pocket every month about $4,148 per month just to own the home.
With substantial property taxes and a lot of interest to deduct, you'll also get a substantial reduction in your income taxes. You'll be able to reduce your taxes in the 33% bracket on all of the amount by which the taxes and interest cause you to go over the standard deduction.

If you had enough other deductions and could deduct all the taxes and interest at 33% federal and 0% state rates for the $34,991 in taxes and interest, you'd save $11,547 in taxes.

So your net cost of payments, taxes, and insurance for the home from month to month would be about around $3,186 per month.

While you will be paying that out of pocket, bear in mind that you are also building your net worth in the form of reduced debt on the principal balance on the mortgage, plus getting the leveraged appreciation on the full value of the house even though you're starting out with a little over 20% of it as your initial 'investment'.

Even in the first year when the ratio of interest to principal in each payment of an amortized loan is high because of the large unpaid balance, you'll reduce your debt by about $10,790 in the first 12 months. That effectively reduces your rent by about $899 per month -- although it's not something you can put your hands from month to month.

If the home is appreciating at only the historical national average of about 5% you'll also have an increase in value of around $40,000 in the first year alone.

That's $3333 per month gain in your net worth. Again, you can't touch it or spend it from month to month or year to year, but it can go a long way toward offsetting the long-term cost of owning the home.

You do take a lot more risk, because there's always a chance that you might have to sell at some time in the future at the same time the housing market was down -- like what happened to a lot of people in the crash of 2008/2009.

There's also a big problem that if you suffer a substantial cut in pay, you'll lose a lot of the tax deduction. Then you'll be paying the higher costs of the bigger mortgage payment and more of the actual costs for property taxes and interest and a time when you are much less able to afford it.

However, you don't suffer the loss if you are not forced to sell, and you have to pay rent to live somewhere anyway. So in the long run -- and assuming a normal housing market -- your cost of owning the home would not really be very much at all, even compared to renting a home that is of considerably less value.

That's because you're building equity in the form of reduced debt and getting leveraged appreciation and tax breaks or yourself instead of being the OP of Other Peoples' Money fame -- who provide the OPM to build the wealth and equity or the landlord.

I'm single, no kids yet, expecting marriage within ~1.5-2 years and kids within 3-4. Long term buy. No debt, portfolio of about $520,000, expected income of $240,000/year give or take a tiny bit. WA State.
Started investing around 21, joined Bogleheads at 23.

runner540
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by runner540 » Wed Jun 14, 2017 10:17 pm

Hard for me to follow that math. It sounds like a realtor trying to sell you. You need to find or create an amortization schedule for a mortgage, so you can see the amount of your payment that is going to principal, because that amount is an increase in net worth. Nothing else really can be counted as an increase in net worth. Tax savings are only "savings" because you sent interest payments to the lender.

Edit: You are paying off principal (increase in networth), but you have to pay a lot of new expenses as well, that used to go to savings. You need to compare savings (increase in net worth) per year that you would have renting, paying only $2500 out as total housing expense, versus how much you can save on your new budget as a homeowner, with $5k+ going out the door every month. For the rental scenario, don't forget the investment income you would have earned on your down payment.

Here's some other math to check:
-What are the property taxes on the homes you are looking at? Look this up in Zillow or public records, and expect the assessment to increase. 1% sounds low for a good school district in a state w/o income tax. If that's actually 2% or 3%, monthly costs jump by $667 or $1334.
-where did 5% historical house appreciation come from? Over the long term it's been 0-1% real return. What is the opportunity cost of leaving your down payment invested in thee market?
-can you swing this big cash outflow without hurting your other goals? (Retirement)

SoonerD
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by SoonerD » Wed Jun 14, 2017 10:38 pm

according to FRED https://fred.stlouisfed.org/series/SPCS20RSA

the 20 city housing index is up 0% the past 10 years and was up about 100% in the ~7 years from 2000 to mid-2006. Very volatile 18 year period and overall the growth is ~3.9% CAGR.

I would never by a place to live based on somebody making a hypothetical kind of guestimate on of future appreciation.

Every investment looks good on paper or in Excel. Most never live up to the hype. In my opinion a house to live in is not a financial investment it's a life style decision. If you get in over your head then the new house will become a nightmare. Proceed with caution; a wrong move may cost much more than money. From what I read of your prior post it seems the house price is way beyond what I'd consider prudent for the stated income.

I wish you the best in thinking through your options and hope whatever you decide turns out to be a blessing!

Minty
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by Minty » Wed Jun 14, 2017 10:43 pm

The assumed 5% appreciation is a red flag. Owning a home with a mortgage is a leveraged commitment. "Your equity is at the top and you own it all the way to the bottom." On preview, I agree with SoonerD.
Core Four with nominal bonds and TIPS.

merits
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by merits » Wed Jun 14, 2017 10:58 pm

The tax part is mostly correctly. Especially if you live in a high state income tax like CA.
Based on your income, your state income tax deduction will probably make you past the standard deduction. All the interest + property tax will be additional deduction to your federal tax. And considering you are single, it is even greater.
There are 2 caveats I see:
1) the interest you pay is declining every year, by year 30, you interest portion of the payment is minimal.
2) The 5% growth is probably not sure for many areas, cannot calculate based on that. I will leave that out of your math.

avalpert
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by avalpert » Wed Jun 14, 2017 11:04 pm

Paying down the principle each month does not increase your net worth at all - it is an equal reduction in assets (the cash you use to make the payment) and liabilities (the reduced debt) for a net $0 impact on net worth. That they would present it otherwise should be a red flag - and that is before getting to the 5% 'estimate' for appreciation and the trite phrase 'other people's money'...

Topic Author
YoungBoglehead
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Wed Jun 14, 2017 11:23 pm

SoonerD wrote:according to FRED https://fred.stlouisfed.org/series/SPCS20RSA

the 20 city housing index is up 0% the past 10 years and was up about 100% in the ~7 years from 2000 to mid-2006. Very volatile 18 year period and overall the growth is ~3.9% CAGR.

I would never by a place to live based on somebody making a hypothetical kind of guestimate on of future appreciation.

Every investment looks good on paper or in Excel. Most never live up to the hype. In my opinion a house to live in is not a financial investment it's a life style decision. If you get in over your head then the new house will become a nightmare. Proceed with caution; a wrong move may cost much more than money. From what I read of your prior post it seems the house price is way beyond what I'd consider prudent for the stated income.

I wish you the best in thinking through your options and hope whatever you decide turns out to be a blessing!

I'm not treating this as an investment, I need a place to live and trying to figure out the true cost of owning this type of home and looking for help.

Even reducing the expected appreciation over 10 years to say 2-3% (keeping up with inflation) can anybody tell me what the true cost is?

Also, true, paying the principal doesn't increase my net worth but at the same time, payments to the principal are in a way paying yourself. Some negatives but not all money lost. Can anyone post some hypothetical numbers?
Started investing around 21, joined Bogleheads at 23.

IMO
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by IMO » Thu Jun 15, 2017 2:40 am

I'd suggest you go through and verify all the specific numbers in your situation/tax bracket via mock tax returns (and check things like property tax rates, insurance rates. Do one as a renter and the other as a homeowner. I did not go through as such as verify them, but do your due diligence on the numbers. Do sample numbers for your pending marriage/kids on the theoretical tax returns also. There is the lost opportunity cost of the down payment funds on one hand, but then there is the imputed rent side also.

The home appreciation number is always an unknown. The worst case scenario is the value goes down over some period of time. That's not really an issue if you are staying in the home for the long term and can simply ride out the downturn. The problem would occur if you lost your job, and/or had to move to another area during the downturn. A forever home situation is different than a shorter 3, 5, 7, 10 yr period for example. Be understanding of the costs required in the sale of a home should that be necessary.

In my opinion, there is a potential for tax law changes. Specifically mentioned was a potential change in the mortgage interest deduction. Some have pointed out that I shouldn't bring that unknown concern into a discussion on decisions. However, presumably there would be information about this before the end of the year? If a change like that occurred with mortgage interest, would it change your decision? Of course, you wouldn't know if in the future it could change again (for the better or worse).

With all that said, it seems there are those on the forum that are pro homeownership, and those that are pro long term renters. I think it's hard to truly know what is best. The NYT buy/rent calculator can help in the decision.

Problem with most homeowners is you get lifestyle inflation. For example, if you were renting, you'd probably be fine with the older cabinets in the kitchen. But when you own the home, it's common to start upgrading things like the cabinets. That is a realistic "cost" of ownership. Keep in mind, upgrading isn't the same as maintenance.

The one issue I'd be careful about is school's in the district of the home as you mention kids are in the plans. If you end up being able to utilize public schools that can go a long way in one's long term financial planning vs. going to private schools.

MoonOrb
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by MoonOrb » Thu Jun 15, 2017 3:10 am

avalpert wrote:Paying down the principle each month does not increase your net worth at all - it is an equal reduction in assets (the cash you use to make the payment) and liabilities (the reduced debt) for a net $0 impact on net worth. That they would present it otherwise should be a red flag - and that is before getting to the 5% 'estimate' for appreciation and the trite phrase 'other people's money'...
This is a little misleading. It's like saying that taking cash from your checking account and placing it into your taxable investing account doesn't increase your net worth because you're moving money simply from one account to the other. Of course, your net worth does increase if you do this systematically, month after month, with your income. Just like when you pay down debt, month after month, with your income, your net worth will increase. I'm not sure how it's a red flag to say this--it's not controversial.

However, I agree about the 5% assumption part. That's a dangerous and seductive assumption to make. The argument presented to you is one in which you gain all of the upsides of leverage and none of the downsides. Maybe that's an outcome that will happen; maybe it won't. But it's a risk with an uncertain outcome, not a sure thing like the way it's been presented.

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YoungBoglehead
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Thu Jun 15, 2017 4:41 am

I appreciate all of your posts, but is it that difficult to just run some hypothetical numbers? I'm reading a lot of posts that aren't saying much.

Assuming my scenario described in the first post
Assuming average interest rate for average term
Assuming $800k house, marriage soon after and adding the wife's $70k/year income to my expected $240k
Assuming WA state, all things normal
Assuming a fair 3.5% annual appreciation rate on the house (I live near Seatlle, no end to the increase in sight)
Assuming 20% down

With all that assumed, is there anybody here with the skills to guesstimate at what the "true cost" is of a mortgage for that house, as in how much money is gone/wasted on taxes/interest, and how much is kept as equity/something similar and gained from the assumed appreciation rate?
Started investing around 21, joined Bogleheads at 23.

runner540
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by runner540 » Thu Jun 15, 2017 6:32 am

YoungBoglehead wrote:I appreciate all of your posts, but is it that difficult to just run some hypothetical numbers? I'm reading a lot of posts that aren't saying much.

Assuming my scenario described in the first post
Assuming average interest rate for average term
Assuming $800k house, marriage soon after and adding the wife's $70k/year income to my expected $240k
Assuming WA state, all things normal What are the taxes, insurance and maintenance for the specific houses you are looking at?
Assuming a fair 3.5% annual appreciation rate on the house (I live near Seatlle, no end to the increase in sight)
Assuming 20% down

With all that assumed, is there anybody here with the skills to guesstimate at what the "true cost" is of a mortgage for that house, as in how much money is gone/wasted on taxes/interest, and how much is kept as equity/something similar and gained from the assumed appreciation rate?
YoungBoglehead, why not try running the numbers yourself? This is the biggest purchase you will likely ever make, so it's important that you understand the full cost of and benefits of both renting and owning, and make your own decision. We've provided the principles that you need to consider in your calculation. When you make your own spreadsheet, you can change the assumptions slightly (for example, appreciation), and see what a big impact it has.

Here's a place to start: https://www.nytimes.com/interactive/201 ... .html?_r=0
Note - this calculator is to compare renting vs owning a comparable property. That's not what you're doing, but it will show you most of the components of owning a house. However, this calculator does NOT take into consideration my concern, which is that your ability to save outside the house payment will be reduced. I don't know your full budget, so you'll have to run those numbers to see if you can save more as a homeowner (principal plus some unknown appreciation), or as a renter, throwing more money each month into investment accounts.

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by avalpert » Thu Jun 15, 2017 10:19 am

MoonOrb wrote:
avalpert wrote:Paying down the principle each month does not increase your net worth at all - it is an equal reduction in assets (the cash you use to make the payment) and liabilities (the reduced debt) for a net $0 impact on net worth. That they would present it otherwise should be a red flag - and that is before getting to the 5% 'estimate' for appreciation and the trite phrase 'other people's money'...
This is a little misleading. It's like saying that taking cash from your checking account and placing it into your taxable investing account doesn't increase your net worth because you're moving money simply from one account to the other.
Not misleading at all - it is a 100% accurate representation of the situation and any other framing is misleading. Taking cash from your checking account and placing it in a taxable investing account doesn't increase your net worth either - at all.
Of course, your net worth does increase if you do this systematically, month after month, with your income.
No, it doesn't increase if you do this systematically any more than it increases if you do it once - it is still a net zero impact to net worth. Now, if what you are investing in appreciates then your net worth increases - but of course if what you are investing in decreases in value your net worth decreases.
Just like when you pay down debt, month after month, with your income, your net worth will increase.
No it won't. It may reduce future interest expense you would otherwise have to pay because you have the debt in the first place - but that starts to get into why claiming that principle payments (or 'investments' on their own) increase net worth is so problematic.
I'm not sure how it's a red flag to say this--it's not controversial.
It's a red flag because it plays to the misguided trope that owning a home increases net worth while renting is 'throwing money away' and that marketing bit by pushers leads to poor decisions. It is the same way with 'investments' - your framing is a great way for a whole life salesman to pitch their products - it is not a good way to understand what matters for increasing net worth.

If it isn't controversial it is only because the salesmen involved have so convinced you of it that you don't reflect on the implications. It should be controversial and it should be corrected when stumbled upon. Paying principle does not increase your net worth - you are paying back the bank for expenses you already incurred.

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by DaftInvestor » Thu Jun 15, 2017 10:46 am

avalpert wrote:
MoonOrb wrote:
avalpert wrote:Paying down the principle each month does not increase your net worth at all - it is an equal reduction in assets (the cash you use to make the payment) and liabilities (the reduced debt) for a net $0 impact on net worth. That they would present it otherwise should be a red flag - and that is before getting to the 5% 'estimate' for appreciation and the trite phrase 'other people's money'...
This is a little misleading. It's like saying that taking cash from your checking account and placing it into your taxable investing account doesn't increase your net worth because you're moving money simply from one account to the other.
Not misleading at all - it is a 100% accurate representation of the situation and any other framing is misleading. Taking cash from your checking account and placing it in a taxable investing account doesn't increase your net worth either - at all.
Of course, your net worth does increase if you do this systematically, month after month, with your income.
No, it doesn't increase if you do this systematically any more than it increases if you do it once - it is still a net zero impact to net worth. Now, if what you are investing in appreciates then your net worth increases - but of course if what you are investing in decreases in value your net worth decreases.
Well I find these answers a bit misleading in their oversimplification because if we are talking ownership of a primary residence versus renting your answers aren't accommodating rental costs. If I pay $1000 out my income towards rent I have $0 gained in networth. If I pay $1000 towards my mortgage - a portion of that goes towards building my networth.

avalpert
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by avalpert » Thu Jun 15, 2017 10:56 am

DaftInvestor wrote:
avalpert wrote:
MoonOrb wrote:
avalpert wrote:Paying down the principle each month does not increase your net worth at all - it is an equal reduction in assets (the cash you use to make the payment) and liabilities (the reduced debt) for a net $0 impact on net worth. That they would present it otherwise should be a red flag - and that is before getting to the 5% 'estimate' for appreciation and the trite phrase 'other people's money'...
This is a little misleading. It's like saying that taking cash from your checking account and placing it into your taxable investing account doesn't increase your net worth because you're moving money simply from one account to the other.
Not misleading at all - it is a 100% accurate representation of the situation and any other framing is misleading. Taking cash from your checking account and placing it in a taxable investing account doesn't increase your net worth either - at all.
Of course, your net worth does increase if you do this systematically, month after month, with your income.
No, it doesn't increase if you do this systematically any more than it increases if you do it once - it is still a net zero impact to net worth. Now, if what you are investing in appreciates then your net worth increases - but of course if what you are investing in decreases in value your net worth decreases.
Well I find these answers a bit misleading in their oversimplification because if we are talking ownership of a primary residence versus renting your answers aren't accommodating rental costs. If I pay $1000 out my income towards rent I have $0 gained in networth. If I pay $1000 towards my mortgage - a portion of that goes towards building my networth.
And your answer doesn't account for the cost of home ownership (including the opportunity cost of that home equity). I agree, comparing rent to mortgage payment is wholly misleading and should be avoided - it is usually used though to justify home buying not renting.

And again, no it doesn't go towards building your net worth - it transfers a portion of your net worth from cash to net home equity. Mortgages aren't paying yourself and rent isn't throwing money away - that is the misleading framing used specifically to encourage buying even when it is economically suboptimal.

MoonOrb
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by MoonOrb » Thu Jun 15, 2017 11:22 am

What happens to net worth when you transfer a portion of it to a rent payment?

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by DaftInvestor » Thu Jun 15, 2017 11:24 am

MoonOrb wrote:What happens to net worth when you transfer a portion of it to a rent payment?
Your helping your landlord build his net worth :)

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by weltschmerz » Thu Jun 15, 2017 11:30 am

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avalpert
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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by avalpert » Thu Jun 15, 2017 11:31 am

MoonOrb wrote:What happens to net worth when you transfer a portion of it to a rent payment?
The same thing that happens to it when you transfer it to interest expense, property taxes, plumbers, electricians, the grocery store...

Even the same things that happens when you have your resources sitting in an asset that appreciates at a slower rate than alternative uses...

None of that changes that principle mortgage payments do not increase your net worth. And your comparison here continues to makes the strong case why that framing is intentionally misleading to lead one to the conclusion that buying is better even when it isn't.

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by Pajamas » Thu Jun 15, 2017 11:42 am

That real estate agent seems to have left out the opportunity cost of the $160k down payment. At only 5% that would produce $8k a year. That right there puts a big dent in the numbers.

Assuming appreciation is another big flaw in the reasoning. Housing prices have still not recovered from the big crash in many areas of the country, for instance in parts of south Florida, where inventory is still increasing, and many other places didn't have a big crash but are essentially flat or even down, especially considering inflation.

There are also a LOT of assumptions and predictions and moving parts in the calculation. The agent even said "wild guess" at one point. Even if you made very conservative estimates of various costs and factors such as inflation and appreciation and interest rates, there is a lot of room for error.

A BIG RED FLAG is the agent talking about using "Other People's Money". That means he is a fan of the "get rich quick" type books and most certainly has his own interests first, if there was any doubt about that.

The biggest problem that I see is that you probably do not actually need an $800k house. Separate the need for a place to live with investing in your planning. If you end up making money on the place you live, fantastic, but it's not the best way to invest.

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by DaftInvestor » Thu Jun 15, 2017 11:52 am

YoungBoglehead wrote:I appreciate all of your posts, but is it that difficult to just run some hypothetical numbers? I'm reading a lot of posts that aren't saying much.

Assuming my scenario described in the first post
Assuming average interest rate for average term
Assuming $800k house, marriage soon after and adding the wife's $70k/year income to my expected $240k
Assuming WA state, all things normal
Assuming a fair 3.5% annual appreciation rate on the house (I live near Seatlle, no end to the increase in sight)
Assuming 20% down

With all that assumed, is there anybody here with the skills to guesstimate at what the "true cost" is of a mortgage for that house, as in how much money is gone/wasted on taxes/interest, and how much is kept as equity/something similar and gained from the assumed appreciation rate?
All the numbers are in your original post above - are they not? You should just adjust the property tax and insurance assumptions with real numbers for your locale (both seemed high to me but I don't live in WA state - For instance - above the insurance rate was 0.5% - I'm only paying 0.15% were I live). The NYT-calculator posted above is decent too. In general (In most cases - there is always a corner case which is why you should run the numbers) - if you are planning to stay put for at least 5 to 7 years (otherwise you have to consider transaction costs of selling) and plan to buy a home of similar size and in similar locale to what you would otherwise rent - it makes sense to buy. Landlords aren't renting to lose money - you can either increase your own net worth or help your landlord increase theirs - plain and simple.

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by avalpert » Thu Jun 15, 2017 11:59 am

DaftInvestor wrote: Landlords aren't renting to lose money - you can either increase your own net worth or help your landlord increase theirs - plain and simple.
And farmers aren't selling crops to lose money you can either increase your own net worth by growing everything yourself or increase theirs.

See, it really isn't plain and simple - not all landlords make money, not all buyers can have ownership costs as low as successful landlords, not all landlords may have better alternative uses of capital and time than a buyer might...

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Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by DaftInvestor » Thu Jun 15, 2017 12:08 pm

avalpert wrote:
DaftInvestor wrote: Landlords aren't renting to lose money - you can either increase your own net worth or help your landlord increase theirs - plain and simple.
And farmers aren't selling crops to lose money you can either increase your own net worth by growing everything yourself or increase theirs.

See, it really isn't plain and simple - not all landlords make money, not all buyers can have ownership costs as low as successful landlords, not all landlords may have better alternative uses of capital and time than a buyer might...
Yup - I said there were corner-cases which is why you should always run the numbers but in the majority of cases landlords make money that could otherwise be converted into net worth by the renter.

I don't think your farmer analogy makes a lot of sense but since you brought it up I will point out that a number of my neighbors do indeed plant rather large gardens to save money on produce (backyard chicken-coups are also on the rise) - and also the fact that farmers are able to keep their costs down and take risks thanks to the billions in subsidies they get from the government.

ianferrel
Posts: 192
Joined: Thu May 29, 2008 5:27 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by ianferrel » Thu Jun 15, 2017 12:21 pm

Your numbers are pretty close to my numbers (our rent was a bit less, our house was a bit more, our interest rate was a bit less) when my wife and I were looking at buying a house 2 years ago (we bought one), and while I didn't follow the full analysis you wrote, it's not too far off what I considered.

You can sort of consider Interest + Maintenance + Property Tax - Income Tax difference as like Rent.

Those are costs that you pay just to have and live in the house, and, just like Rent, they go away and don't add to your net worth. Interest is literally rent on money. Maintenance is what you need to keep things going the same (not upgrades). Property tax is (sort of) "rent" on the land from the government (I mean, legally, it's quite different, but effectively it's pretty similar), and the tax deduction is a discount on those two "rents" you're paying.

Maintenance you'll have to estimate, but Interest, Prop Tax, and Income Tax difference should be well-defined.

Paying down Principal is a wash. It doesn't change your net worth, it just makes you less leveraged. It matters in terms of cash flow, since you do have to have the full mortgage payment every month, and it matters in terms of opportunity cost (if you're paying down your mortgage, you're not investing elsewhere).

Appreciation of the house is a big question mark. Since you're 4:1 leveraged for quite a while, it could be very good or very not good. How many years sales fees will be split over is a littler question mark.

What it came down to for us, under pretty similar circumstances, was that buying the house we bought cost slightly more in the near term (again, not counting the principal payment each month), but it was a big lifestyle upgrade (2 bdrm 1bath to 3/2, tiny yard to large yard) at a very similar cost to our rent. And in the long term, our effective "rent" will go down over time (principal payments get larger, interest gets smaller, prop tax gets larger, but---in CA---slower than inflation). And also the opportunity cost of investing in a house rather than the market grows.

keystone
Posts: 544
Joined: Tue Aug 28, 2012 12:34 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by keystone » Thu Jun 15, 2017 12:24 pm


Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $667 per month you'd need to be able to set aside. That's a total of about $5,148 per month to own the home, and that's before you heat it cool it and furnish it.


Property taxes at perhaps 1.% of the value of the home will be around $667 per month.

Insurance at a wild guess of 0.5% of the value of the home would be $333 per month, making the total out of pocket every month about $4,148 per month just to own the home.
Shouldn't that be $6,148 per month based on the other pieces that are quoted?
If you had enough other deductions and could deduct all the taxes and interest at 33% federal and 0% state rates for the $34,991 in taxes and interest, you'd save $11,547 in taxes.

So your net cost of payments, taxes, and insurance for the home from month to month would be about around $3,186 per month.
Likewise, shouldn't that be $5,186 per month?

usnaron
Posts: 113
Joined: Wed Oct 28, 2009 9:20 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by usnaron » Thu Jun 15, 2017 5:24 pm

“Hey I’ve got an idea. We’re always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like?”

Well, let’s see now (pulling out our lined yellow pad), let’s make a list. To be really terrible:
•It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
•It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
•It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
•It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
•It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
•It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
•It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
•It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
•It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
•It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
•It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
•It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
•It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
•It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
•It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
•It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
•It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.
•For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.
Boy howdy! That’s quite a list! Any investment that ugly would make my skin crawl. In fact, I’m not sure you could rightly call anything with those characteristics an investment at all.

Then, too, the challenge would be to get anybody to buy this turkey. But we can. In fact, I bet we can get them not only to buy but to believe doing so is the fulfillment of a dream, indeed a national birthright!

runner540
Posts: 1081
Joined: Sun Feb 26, 2017 5:43 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by runner540 » Thu Jun 15, 2017 5:29 pm

usnaron wrote:“Hey I’ve got an idea. We’re always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like?”

Well, let’s see now (pulling out our lined yellow pad), let’s make a list. To be really terrible:
•It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
•It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
•It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
•It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
•It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
•It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
•It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
•It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
•It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
•It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
•It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
•It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
•It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
•It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
•It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
•It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
•It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.
•For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.
Boy howdy! That’s quite a list! Any investment that ugly would make my skin crawl. In fact, I’m not sure you could rightly call anything with those characteristics an investment at all.

Then, too, the challenge would be to get anybody to buy this turkey. But we can. In fact, I bet we can get them not only to buy but to believe doing so is the fulfillment of a dream, indeed a national birthright!
Here's the citation: http://jlcollinsnh.com/2013/05/29/why-y ... nvestment/

Topic Author
YoungBoglehead
Posts: 350
Joined: Sat Oct 29, 2011 11:25 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Thu Jun 15, 2017 7:55 pm

runner540 wrote: YoungBoglehead, why not try running the numbers yourself? This is the biggest purchase you will likely ever make, so it's important that you understand the full cost of and benefits of both renting and owning, and make your own decision. We've provided the principles that you need to consider in your calculation. When you make your own spreadsheet, you can change the assumptions slightly (for example, appreciation), and see what a big impact it has.

Here's a place to start: https://www.nytimes.com/interactive/201 ... .html?_r=0
Note - this calculator is to compare renting vs owning a comparable property. That's not what you're doing, but it will show you most of the components of owning a house. However, this calculator does NOT take into consideration my concern, which is that your ability to save outside the house payment will be reduced. I don't know your full budget, so you'll have to run those numbers to see if you can save more as a homeowner (principal plus some unknown appreciation), or as a renter, throwing more money each month into investment accounts.
Well if I knew how to run the numbers I certainly would just do it myself. I've never bought before and I'm smart enough to know there are a lot of things I don't know or would miss as someone who's never done this before, so I was hoping somebody with experience could help guide me a bit. There are a lot of posts in here but not one calculation, that's ok.

Here, I'll write out a list of things I'm assuming I have to factor in.

Mortgage payment
Maintenance (would like some estimates but I'm assuming a few thousand per year)
Interest on the loan (difficult to calculate especially when each payment lowers interest therefore changing the interest vs equity payment)
Property taxes (not sure what they are here but can try to find out)
Income Tax difference
Selling costs
My gain in equity
loss of potentially invested money from down payment
Closing costs (I was told there aren't any.. what are these?)
Homeowners insurance (I need to research this and get a quote I'm guessing)

I'll need to do more research on my own but I just wanted to try my luck and see if anyone here was experienced enough to give me any sort of estimate of the true cost. Sort of like the guy I quoted.

I would simply tweak his numbers, but people in here can't even seem to get the monthly cost right so not sure what to tweak. Some are saying it would be $3,500/month, some saying $4,500/month, some saying as high as $5,500/month.
Started investing around 21, joined Bogleheads at 23.

randomguy
Posts: 8510
Joined: Wed Sep 17, 2014 9:00 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by randomguy » Thu Jun 15, 2017 10:22 pm

If you can get 5% appreciation/year, you really should looking into buying a 5 million dollar house. You will make more than enough to retire in a couple of years:) The problem of course is that appreciation is guaranteed. You could be buying a the top for all you (or the agent) know.

If you ignore appreciation, the deal is pretty much break even. You are paying ~2600 more per month but you are getting something like a 1k tax savings and 1500 or so of your paymnet is giong towards principle. You would have to decide if the benefits (appreciations, inflation protection) is worth the downside (moving is expensive, house could lose money,...).

randomguy
Posts: 8510
Joined: Wed Sep 17, 2014 9:00 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by randomguy » Thu Jun 15, 2017 10:26 pm

YoungBoglehead wrote:
runner540 wrote: YoungBoglehead, why not try running the numbers yourself? This is the biggest purchase you will likely ever make, so it's important that you understand the full cost of and benefits of both renting and owning, and make your own decision. We've provided the principles that you need to consider in your calculation. When you make your own spreadsheet, you can change the assumptions slightly (for example, appreciation), and see what a big impact it has.

Here's a place to start: https://www.nytimes.com/interactive/201 ... .html?_r=0
Note - this calculator is to compare renting vs owning a comparable property. That's not what you're doing, but it will show you most of the components of owning a house. However, this calculator does NOT take into consideration my concern, which is that your ability to save outside the house payment will be reduced. I don't know your full budget, so you'll have to run those numbers to see if you can save more as a homeowner (principal plus some unknown appreciation), or as a renter, throwing more money each month into investment accounts.
Well if I knew how to run the numbers I certainly would just do it myself. I've never bought before and I'm smart enough to know there are a lot of things I don't know or would miss as someone who's never done this before, so I was hoping somebody with experience could help guide me a bit. There are a lot of posts in here but not one calculation, that's ok.

Here, I'll write out a list of things I'm assuming I have to factor in.

Mortgage payment
Maintenance (would like some estimates but I'm assuming a few thousand per year)
Interest on the loan (difficult to calculate especially when each payment lowers interest therefore changing the interest vs equity payment)
Property taxes (not sure what they are here but can try to find out)
Income Tax difference
Selling costs
My gain in equity
loss of potentially invested money from down payment
Closing costs (I was told there aren't any.. what are these?)
Homeowners insurance (I need to research this and get a quote I'm guessing)

I'll need to do more research on my own but I just wanted to try my luck and see if anyone here was experienced enough to give me any sort of estimate of the true cost. Sort of like the guy I quoted.

I would simply tweak his numbers, but people in here can't even seem to get the monthly cost right so not sure what to tweak. Some are saying it would be $3,500/month, some saying $4,500/month, some saying as high as $5,500/month.
https://www.nytimes.com/interactive/201 ... .html?_r=0 does a pretty decent job. Put in your assumptions and see what pops out. Then adjust them (see what 0% versus 5% appreciation, you move in 3 years versus 15).

randomguy
Posts: 8510
Joined: Wed Sep 17, 2014 9:00 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by randomguy » Thu Jun 15, 2017 10:29 pm

YoungBoglehead wrote:
runner540 wrote: YoungBoglehead, why not try running the numbers yourself? This is the biggest purchase you will likely ever make, so it's important that you understand the full cost of and benefits of both renting and owning, and make your own decision. We've provided the principles that you need to consider in your calculation. When you make your own spreadsheet, you can change the assumptions slightly (for example, appreciation), and see what a big impact it has.

Here's a place to start: https://www.nytimes.com/interactive/201 ... .html?_r=0
Note - this calculator is to compare renting vs owning a comparable property. That's not what you're doing, but it will show you most of the components of owning a house. However, this calculator does NOT take into consideration my concern, which is that your ability to save outside the house payment will be reduced. I don't know your full budget, so you'll have to run those numbers to see if you can save more as a homeowner (principal plus some unknown appreciation), or as a renter, throwing more money each month into investment accounts.
Well if I knew how to run the numbers I certainly would just do it myself. I've never bought before and I'm smart enough to know there are a lot of things I don't know or would miss as someone who's never done this before, so I was hoping somebody with experience could help guide me a bit. There are a lot of posts in here but not one calculation, that's ok.

Here, I'll write out a list of things I'm assuming I have to factor in.

Mortgage payment
Maintenance (would like some estimates but I'm assuming a few thousand per year)
Interest on the loan (difficult to calculate especially when each payment lowers interest therefore changing the interest vs equity payment)
Property taxes (not sure what they are here but can try to find out)
Income Tax difference
Selling costs
My gain in equity
loss of potentially invested money from down payment
Closing costs (I was told there aren't any.. what are these?)
Homeowners insurance (I need to research this and get a quote I'm guessing)

I'll need to do more research on my own but I just wanted to try my luck and see if anyone here was experienced enough to give me any sort of estimate of the true cost. Sort of like the guy I quoted.

I would simply tweak his numbers, but people in here can't even seem to get the monthly cost right so not sure what to tweak. Some are saying it would be $3,500/month, some saying $4,500/month, some saying as high as $5,500/month.
https://www.nytimes.com/interactive/201 ... .html?_r=0 which was listed early does a pretty decent job of factoring all that stuff in. A real estate agent should be able to give you the tax rates in your area. And there are always closing costs. It is just a matter of how they get accounted for.

Topic Author
YoungBoglehead
Posts: 350
Joined: Sat Oct 29, 2011 11:25 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Thu Jun 15, 2017 10:39 pm

Thanks guys for the links. One of those links showed me that renting is nowhere near as good as buying.
randomguy wrote:If you can get 5% appreciation/year, you really should looking into buying a 5 million dollar house. You will make more than enough to retire in a couple of years:) The problem of course is that appreciation is guaranteed. You could be buying a the top for all you (or the agent) know.

If you ignore appreciation, the deal is pretty much break even. You are paying ~2600 more per month but you are getting something like a 1k tax savings and 1500 or so of your paymnet is giong towards principle. You would have to decide if the benefits (appreciations, inflation protection) is worth the downside (moving is expensive, house could lose money,...).

Very interesting. That's really exciting to me. The idea of buying and Really putting a dent in my financial future has been stressing me out. With this calculation of actually no appreciation showing me that I almost break even, that's a huge relief. Thank you. I'm sure there will be some appreciation in the home too.
Started investing around 21, joined Bogleheads at 23.

KlangFool
Posts: 14573
Joined: Sat Oct 11, 2008 12:35 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by KlangFool » Thu Jun 15, 2017 10:55 pm

YoungBoglehead wrote:
Thanks guys for the links. One of those links showed me that renting is nowhere near as good as buying.
YoungBoglehead,

Before you pat yourself on the back, please ask this simple question:

Will you rent this house if it is substantially cheaper to rent?

If the answer is no, you had lied to yourself. You had just justified your purchase by picking a house that you would not rent even if it is cheaper to rent. This is common and normal for most people.

KlangFool

randomguy
Posts: 8510
Joined: Wed Sep 17, 2014 9:00 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by randomguy » Thu Jun 15, 2017 11:06 pm

YoungBoglehead wrote:Thanks guys for the links. One of those links showed me that renting is nowhere near as good as buying.
randomguy wrote:If you can get 5% appreciation/year, you really should looking into buying a 5 million dollar house. You will make more than enough to retire in a couple of years:) The problem of course is that appreciation is not guaranteed. You could be buying a the top for all you (or the agent) know.

If you ignore appreciation, the deal is pretty much break even. You are paying ~2600 more per month but you are getting something like a 1k tax savings and 1500 or so of your paymnet is giong towards principle. You would have to decide if the benefits (appreciations, inflation protection) is worth the downside (moving is expensive, house could lose money,...).

Very interesting. That's really exciting to me. The idea of buying and Really putting a dent in my financial future has been stressing me out. With this calculation of actually no appreciation showing me that I almost break even, that's a huge relief. Thank you. I'm sure there will be some appreciation in the home too.

Note that you need to double check all the numbers for your situation. You really also need to subtract opportunity costs (i.e. that downpayment that could be earning 7%) and add in appreciation.

Long term (10+) buying almost always works out. Short term (<3 years) rarely works out as transaction fees are killer. What makes renting a good deal for most single people is that they are willing to rent a lot less (1 bedroom) than they are willing to buy (some 3 bedroom house)

runner540
Posts: 1081
Joined: Sun Feb 26, 2017 5:43 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by runner540 » Thu Jun 15, 2017 11:06 pm

Here is another tool for you to check out: this will show you how much of each payment will go to interest, versus principal
http://www.bankrate.com/calculators/mor ... lator.aspx

You will be building equity, but keep in mind that your monthly cash outflow for shelter is going to increase significantly (from $2500 rent to $4815 - see calcs below). Where are you going to get the $2315 additional per month? Probably by reducing how much you can invest/grow your net worth in other ways (retirement, taxable account, etc.).

Cash outflow for shelter today: $2500/month
Cash outflow for shelter under ownership scenario:
4.25%, $640k, 30 years: $3148/month (principal and interest)
All-in taxes, insurance and maintenance based on your info: 2.5% of house value ($20k per year, or $1667/month)
Total: $4815/month
Net out income tax savings: ??
**Disclaimer on these calcs: rough estimate using info you provided. Please run your own numbers with more precise assumptions**

Opportunity cost: You are shifting down payment $ from an investment account to the house. Which will appreciate faster? None of us know for sure.

You are reallocating part of your monthly budget from savings/investment accounts to paying for the house, and it might be a wash, or it might not. Due to the amortization schedule (see link above), the early years of your mortgage payment is mostly interest, which does not build equity. As randomguy said, you have to decide if that is worth it to you.

ConcernedKid
Posts: 71
Joined: Tue Dec 31, 2013 10:59 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by ConcernedKid » Thu Jun 15, 2017 11:29 pm

Young Boglehead,

If you are in WA State, I'm going to go out on a limb and guess you are in King County. If you are, you can look up the property taxes for any King County Property online. http://www.kingcounty.gov/services/home-property.aspx Click on "find property by address" to get the numbers for any property you are considering within King County. If you are not in King County you can still go to your county assessor's site, put in the property address, and get the property tax info for any property. I believe Washington State property taxes are capped at 1% of the market value (note this does not include levies or other provisions that are put to a vote).

You can go to Bankrate.com to look into current mortgage interest rates. I also suggest looking at local credit unions such as Verity Credit Union and BECU and national credit unions such as Navy Federal (if you qualify) and PenFed to get an idea of actual payment numbers. Home prices here are crazy but rents tend to be high as well.

Look at areas with a good public school options if you plan to have kids in 3-4 years. Renting and investing your disposable income will probably put you ahead if you are looking to move within 5 years. Buying is probably the better option if you're staying put longer than that.

Topic Author
YoungBoglehead
Posts: 350
Joined: Sat Oct 29, 2011 11:25 am

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by YoungBoglehead » Thu Jun 15, 2017 11:34 pm

KlangFool wrote:
YoungBoglehead wrote:
Thanks guys for the links. One of those links showed me that renting is nowhere near as good as buying.
YoungBoglehead,

Before you pat yourself on the back, please ask this simple question:

Will you rent this house if it is substantially cheaper to rent?

If the answer is no, you had lied to yourself. You had just justified your purchase by picking a house that you would not rent even if it is cheaper to rent. This is common and normal for most people.

KlangFool
I didn't quite understand that question. Which house, would I rent my current house if it were cheaper? Or, this hypothetical $800k house?

Either way, I'm sure the answer is yes, I'd rent it if it were cheaper. The fact is it's not though, so I don't see how that's relevant. Maybe I didn't understand your point?

Also, nowhere in here am I attempting to justify anything, just trying to discover what the best option is financially for me assuming I need that quality of house for my future plans.
Started investing around 21, joined Bogleheads at 23.

KlangFool
Posts: 14573
Joined: Sat Oct 11, 2008 12:35 pm

Re: Buying cost vs renting (specifically for me)... can anyone fact check this?

Post by KlangFool » Fri Jun 16, 2017 7:45 am

YoungBoglehead wrote:
KlangFool wrote:
YoungBoglehead wrote:
Thanks guys for the links. One of those links showed me that renting is nowhere near as good as buying.
YoungBoglehead,

Before you pat yourself on the back, please ask this simple question:

Will you rent this house if it is substantially cheaper to rent?

If the answer is no, you had lied to yourself. You had just justified your purchase by picking a house that you would not rent even if it is cheaper to rent. This is common and normal for most people.

KlangFool
I didn't quite understand that question. Which house, would I rent my current house if it were cheaper? Or, this hypothetical $800k house?

Either way, I'm sure the answer is yes, I'd rent it if it were cheaper. The fact is it's not though, so I don't see how that's relevant. Maybe I didn't understand your point?

Also, nowhere in here am I attempting to justify anything, just trying to discover what the best option is financially for me assuming I need that quality of house for my future plans.
YoungBoglehead,

<< However I have a different question. Basically, I'm renting a home now that will be about $2,500/month after an upcoming lease renewal. I'm considering buying a $800,000 home and trying to understand the "true cost">>

<<Either way, I'm sure the answer is yes, I'd rent it if it were cheaper.>>

You had lied to yourself. You could rent at $2,500 per month. So, why should you pay more than $2,500 per month in PITI on buying a house?

So, either

A) You could rent the 800K house at $2,500 per month.

B) Or, more likely, the current house that you rent is substantially less expensive than 800K.

This is a very common LIE that people use to justify their house purchase.

You are willing to rent at $2,500. But, you are willing to spend a lot more on the mortgage when you buy a house. This is a common scam.

Actually, considering the RISK and COST of house ownership that extend beyond the mortgage payment. At the minimal, the mortgage payment needs to be lower than the rent before it is financially justifiable.

My current house rent for $2,200 to $2,300. My PITI (monthly principal, interest, taxes, and insurance) payment is $1,800 per month. So, I buy.

You will spend a lot more to buy the house. It is not cheaper than renting. It is a lifestyle decision. Make sure that it is worth the money and risk.

KlangFool

P.S.: The PITI is based on 20% down payment with a 30 years fixed rate mortgage.

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