Looking for some help and fast (buying vs renting, net worth)

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TheBogleWay
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Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 7:29 pm

Hi All,

Thank you very very much in advance, you guys will help me make a big life decision very soon. I came across a home today that to me seems rare. I was thinking of buying 7-8 months from now, but now it turns out if I want this home, I need to move very quickly and buy.

So, here's my question. All other factors removed, just this simple math, which person would come out financially ahead?

Person A) is renting for $2,550/month and continues renting for 12 more months, and then buys a home with a mortgage with a total mortgage related monthly cost of $4,800/mo at a 30 year loan, standard rates.


Person B) Same as person A, except they buy the home with a $4,800 cost now, instead of waiting 12 months.



Long term, would person B come out ahead? I'm not sure, but they may because they are actually gaining equity vs person A who while they pay less, isn't gaining any equity.

Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.

TheBogleWay
Posts: 154
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 8:04 pm

And actually, I have a separate question I’m wondering about too.

Just simple math, long term, would a person be more well off financially renting for $2,550/mo, or if they bought a home but the 30 year mortgage payment was $4,800/mo?

I can’t tell because while the rent is cheaper, there’s zero equity.


This home was built 3 years ago so no repairs will be needed. I’d live there for 10 years or so maybe less.

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willthrill81
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Sun Feb 18, 2018 8:13 pm

I'm admittedly biased toward home ownership, so I'd lean toward scenario B. Unless you need the liquidity provided by saving the $2,450 monthly with paying rent instead of a higher mortgage, you'll save yourself the $30k you would otherwise be paying in rent for a year. That's money that you'll never recover.

Keep in mind that this also means that you'll have the home ownership and mortgage costs a year sooner as well (e.g. mortgage interest, maintenance, taxes). Our home is only three years old, but we still have to spend some on maintenance. A switch in our bathroom broke just a few days ago; it only cost $3 and time to fix, but if I wasn't able to fix it myself, it would have cost us close to $100 to get an electrician to do it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TheBogleWay
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 8:18 pm

willthrill81 wrote:
Sun Feb 18, 2018 8:13 pm
I'm admittedly biased toward home ownership, so I'd lean toward scenario B. Unless you need the liquidity provided by saving the $2,450 monthly with paying rent instead of a higher mortgage, you'll save yourself the $30k you would otherwise be paying in rent for a year. That's money that you'll never recover.

Keep in mind that this also means that you'll have the home ownership and mortgage costs a year sooner as well (e.g. mortgage interest, maintenance, taxes). Our home is only three years old, but we still have to spend some on maintenance. A switch in our bathroom broke just a few days ago; it only cost $3 and time to fix, but if I wasn't able to fix it myself, it would have cost us close to $100 to get an electrician to do it.

Im hoping to hear others who agree with you. I’m aware there could potentially be maintenance costs but it should be minimal because it’s 3 years old. I’d do a full inspection too.

So you think person B would come out about $30k ahead? I figured the unknown factor would be interest. Hmm.

Can anyone else confirm and comment on question #2 as well?

PS, I don’t need the liquidity.

Jon H
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Jon H » Sun Feb 18, 2018 8:22 pm

Aside from the lost 30k, the answer depends on the mortgage interest rates in the two options.

In a rising interest enviornment such as we have had the last few years and expect to have this year, option B with its lower interest rate probably wins by even more than 30k. How much better depends on the magnitude of interest rate increases.

If you know what the current mortgage rates are today, you can run the projections using Excel functions and figure it out.
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

TheBogleWay
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 8:27 pm

Jon H wrote:
Sun Feb 18, 2018 8:22 pm
Aside from the lost 30k, the answer depends on the mortgage interest rates in the two options.

In a rising interest enviornment such as we have had the last few years and expect to have this year, option B with its lower interest rate probably wins by even more than 30k. How much better depends on the magnitude of interest rate increases.

If you know what the current mortgage rates are today, you can run the projections using Excel functions and figure it out.
Smart reply I see what you mean.

However just for hypothetical reasons, what if we assumed interest rates were staying the same for a while or it was a “normal” period, would you think person A comes out ahead? Or is it really that close.

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willthrill81
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Sun Feb 18, 2018 8:28 pm

TheBogleWay wrote:
Sun Feb 18, 2018 8:27 pm
Jon H wrote:
Sun Feb 18, 2018 8:22 pm
Aside from the lost 30k, the answer depends on the mortgage interest rates in the two options.

In a rising interest enviornment such as we have had the last few years and expect to have this year, option B with its lower interest rate probably wins by even more than 30k. How much better depends on the magnitude of interest rate increases.

If you know what the current mortgage rates are today, you can run the projections using Excel functions and figure it out.
Smart reply I see what you mean.

However just for hypothetical reasons, what if we assumed interest rates were staying the same for a while or it was a “normal” period, would you think person A comes out ahead? Or is it really that close.
In what way do you think that person A could possibly come out ahead? I'm just curious.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Sun Feb 18, 2018 8:31 pm

TheBogleWay wrote:
Sun Feb 18, 2018 7:29 pm
Hi All,

Thank you very very much in advance, you guys will help me make a big life decision very soon. I came across a home today that to me seems rare. I was thinking of buying 7-8 months from now, but now it turns out if I want this home, I need to move very quickly and buy.

So, here's my question. All other factors removed, just this simple math, which person would come out financially ahead?

Person A) is renting for $2,550/month and continues renting for 12 more months, and then buys a home with a mortgage with a total mortgage related monthly cost of $4,800/mo at a 30 year loan, standard rates.


Person B) Same as person A, except they buy the home with a $4,800 cost now, instead of waiting 12 months.



Long term, would person B come out ahead? I'm not sure, but they may because they are actually gaining equity vs person A who while they pay less, isn't gaining any equity.

Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.
TheBogleWay,

A) Long-term, both (A) and (B) lose because they had more than double their housing expense.

<<Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.>>

B) That means both (A) and (B) are not rich enough to be Financially Independent yet. And, they choose to be "House Poor" and spend a lot more on housing.

The question is very simple.

How long will it take to be FI after buying the house? Versus not buying the house? Does it worth that many years of the person's life? It costs at least 36K per year if not more.

KlangFool

Jon H
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Joined: Sun Jan 21, 2018 2:50 pm

Re: Looking for some help and fast (buying vs renting, net worth)

Post by Jon H » Sun Feb 18, 2018 8:31 pm

Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

TheBogleWay
Posts: 154
Joined: Mon Dec 05, 2016 9:04 pm

Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 8:39 pm

KlangFool wrote:
Sun Feb 18, 2018 8:31 pm
TheBogleWay wrote:
Sun Feb 18, 2018 7:29 pm
Hi All,

Thank you very very much in advance, you guys will help me make a big life decision very soon. I came across a home today that to me seems rare. I was thinking of buying 7-8 months from now, but now it turns out if I want this home, I need to move very quickly and buy.

So, here's my question. All other factors removed, just this simple math, which person would come out financially ahead?

Person A) is renting for $2,550/month and continues renting for 12 more months, and then buys a home with a mortgage with a total mortgage related monthly cost of $4,800/mo at a 30 year loan, standard rates.


Person B) Same as person A, except they buy the home with a $4,800 cost now, instead of waiting 12 months.



Long term, would person B come out ahead? I'm not sure, but they may because they are actually gaining equity vs person A who while they pay less, isn't gaining any equity.

Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.
TheBogleWay,

A) Long-term, both (A) and (B) lose because they had more than double their housing expense.

<<Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.>>

B) That means both (A) and (B) are not rich enough to be Financially Independent yet. And, they choose to be "House Poor" and spend a lot more on housing.

The question is very simple.

How long will it take to be FI after buying the house? Versus not buying the house? Does it worth that many years of the person's life? It costs at least 36K per year if not more.

KlangFool

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!

TheBogleWay
Posts: 154
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 8:54 pm

willthrill81 wrote:
Sun Feb 18, 2018 8:28 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:27 pm
Jon H wrote:
Sun Feb 18, 2018 8:22 pm
Aside from the lost 30k, the answer depends on the mortgage interest rates in the two options.

In a rising interest enviornment such as we have had the last few years and expect to have this year, option B with its lower interest rate probably wins by even more than 30k. How much better depends on the magnitude of interest rate increases.

If you know what the current mortgage rates are today, you can run the projections using Excel functions and figure it out.
Smart reply I see what you mean.

However just for hypothetical reasons, what if we assumed interest rates were staying the same for a while or it was a “normal” period, would you think person A comes out ahead? Or is it really that close.
In what way do you think that person A could possibly come out ahead? I'm just curious.

IF I had to guess, possibly because they have more month to invest in the stock market monthly? About $2,300 extra per month. That, plus person B is paying a lot in interest.

I really really am hoping that person B comes out ahead so I’m refreshing the thread like mad. I have to decide by the morning...

KlangFool
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Sun Feb 18, 2018 9:11 pm

TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool

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willthrill81
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Sun Feb 18, 2018 9:11 pm

TheBogleWay wrote:
Sun Feb 18, 2018 8:54 pm
willthrill81 wrote:
Sun Feb 18, 2018 8:28 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:27 pm
Jon H wrote:
Sun Feb 18, 2018 8:22 pm
Aside from the lost 30k, the answer depends on the mortgage interest rates in the two options.

In a rising interest enviornment such as we have had the last few years and expect to have this year, option B with its lower interest rate probably wins by even more than 30k. How much better depends on the magnitude of interest rate increases.

If you know what the current mortgage rates are today, you can run the projections using Excel functions and figure it out.
Smart reply I see what you mean.

However just for hypothetical reasons, what if we assumed interest rates were staying the same for a while or it was a “normal” period, would you think person A comes out ahead? Or is it really that close.
In what way do you think that person A could possibly come out ahead? I'm just curious.

IF I had to guess, possibly because they have more month to invest in the stock market monthly? About $2,300 extra per month. That, plus person B is paying a lot in interest.

I really really am hoping that person B comes out ahead so I’m refreshing the thread like mad. I have to decide by the morning...
That $2,300 extra per month invested in stocks will not overcome the $30k lost in rent for about 11 years if you got a 7% real annual return (aggressive in my view) on the money. Now over the course of a 30 year mortgage, that $27,600 invested in stocks will almost certainly be worth far more than the $30k lost in rent with person A, but we don't know whether that will be enough to really 'budge the needle' as far as your other goals go. Plus, we don't know whether the mortgage interest you would pay would be greater by taking it out in a year as opposed to now, but it seems very likely to be higher. And with that large of a mortgage, a higher rate could offset most or perhaps even all of the money gained by investing the $27,600 in stocks.

If you know you're going to get the mortgage in no more than a year and can do it now, I'd do it now. Lock in a low rate while you can.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TheBogleWay
Posts: 154
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 9:13 pm

KlangFool wrote:
Sun Feb 18, 2018 9:11 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool

While I appreciate your advice, I feel like you’re derailing the thread it a bit.

This payment falls very well below the rule of thumb for housing costs for us. That, and I have many many years of cost of living saved up with no other debt. I can afford it.

Do you know which person A or B would come out ahead based on my questions in the first post? Or in your words, which would “lose” faster?


Thanks Klang.
Last edited by TheBogleWay on Sun Feb 18, 2018 9:14 pm, edited 1 time in total.

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willthrill81
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Sun Feb 18, 2018 9:14 pm

KlangFool wrote:
Sun Feb 18, 2018 9:11 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool
We have no idea what the OP's savings rate is, and that's more important than the OP's current net worth. As long as the OP will be able to save enough to meet their financial goals (which we also don't know), taking out a mortgage isn't necessarily a problem at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MoonOrb
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by MoonOrb » Sun Feb 18, 2018 9:32 pm

Person A comes out ahead in your hypothetical because they can invest $27000 over the next year and then leave it invested for 30 years where it will grow to, say, about $185000 if you were to assume a 6% nominal return. Person B starts paying the higher house payment now and must wait 30 years to invest the entire $4800/mo, where they'll amass about $60k over a single year if you assume the same 6% nominal return.

But it's difficult to hold all things equal: if a house payment is $4800/mo, the price of the house is what? $1M or more? In your hypothetical example, you're assuming that Person A and Person B spend the exact same amount on a house one year apart. That's totally fine if that's your plan, but what happens if Person A waits a year and the house is no longer worth $1M but has gone up to $1,050,000? Or more? Then the cost of their home ownership goes up by about $2000/year in interest, assuming the interest rates in a year stay the same. If interests rates were to rise about .5%, Person A and Person B would end up just about breaking even, I think.

This is just all back of the envelope math, but I don't think this is a situation where getting the answer to your question actually helps you. The biggest factors will be what happens to (a) the housing market and (b) the mortgage rate market over the next 12 months. If housing prices drop and interest rates drop, Person A will come out pretty far ahead. If housing prices jump and interest rates jump, Person B should do better.

KlangFool
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Sun Feb 18, 2018 9:37 pm

TheBogleWay wrote:
Sun Feb 18, 2018 9:13 pm
KlangFool wrote:
Sun Feb 18, 2018 9:11 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool

While I appreciate your advice, I feel like you’re derailing the thread it a bit.

This payment falls very well below the rule of thumb for housing costs for us. That, and I have many many years of cost of living saved up with no other debt. I can afford it.

Do you know which person A or B would come out ahead based on my questions in the first post? Or in your words, which would “lose” faster?


Thanks Klang.
TheBogleWay,

Isn't the answer obvious? (B) is spending more on housing one year longer than (A). So, how could (B) be ahead of (A)?

KlangFool

TheBogleWay
Posts: 154
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Sun Feb 18, 2018 9:49 pm

KlangFool wrote:
Sun Feb 18, 2018 9:37 pm
TheBogleWay wrote:
Sun Feb 18, 2018 9:13 pm
KlangFool wrote:
Sun Feb 18, 2018 9:11 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool

While I appreciate your advice, I feel like you’re derailing the thread it a bit.

This payment falls very well below the rule of thumb for housing costs for us. That, and I have many many years of cost of living saved up with no other debt. I can afford it.

Do you know which person A or B would come out ahead based on my questions in the first post? Or in your words, which would “lose” faster?


Thanks Klang.
TheBogleWay,

Isn't the answer obvious? (B) is spending more on housing one year longer than (A). So, how could (B) be ahead of (A)?

KlangFool

...because one is gaining equity vs just paying rent?

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

Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Sun Feb 18, 2018 9:55 pm

TheBogleWay wrote:
Sun Feb 18, 2018 9:49 pm
KlangFool wrote:
Sun Feb 18, 2018 9:37 pm
TheBogleWay wrote:
Sun Feb 18, 2018 9:13 pm
KlangFool wrote:
Sun Feb 18, 2018 9:11 pm
TheBogleWay wrote:
Sun Feb 18, 2018 8:39 pm

Hey Klang,

I’m not sure if I’m misunderstanding or if you’re misunderstanding something, but I don’t know how you arrived at that summary. A few comments.

1) my question is does A or B come out ahead. Saying they both lose doesn’t really answer that. Ok, who loses faster, person A or B?

2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily.

With our combined income, $4,800/mo is about 17% of our before tax monthly income total. That’s on the conservative end. On my single income only it’s anout 22% of my monthly income myself. Leaving significant amounts of living money after mortagages to save and invest l, etc.

Most important is my part 1 above, I want to know if A beats B, #2 is more just informative. Thanks!
TheBogleWay,

You believe that you can afford the house because you have the income.

<< 2) the part about us not being rich enough. While I don’t consider myself rich, I’m just not sure where you got that impression by my statement saying we can afford it easily. >>

How much is your net worth excluding the house after you bought it? Is it 2.5 times the house price? Or, a lot more? That is the other way of looking at this.

KlangFool

While I appreciate your advice, I feel like you’re derailing the thread it a bit.

This payment falls very well below the rule of thumb for housing costs for us. That, and I have many many years of cost of living saved up with no other debt. I can afford it.

Do you know which person A or B would come out ahead based on my questions in the first post? Or in your words, which would “lose” faster?


Thanks Klang.
TheBogleWay,

Isn't the answer obvious? (B) is spending more on housing one year longer than (A). So, how could (B) be ahead of (A)?

KlangFool

...because one is gaining equity vs just paying rent?
What equity? How much do you lose by not investing the down payment? How much do you lose by mortgage interest?

Klangfool

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Sun Feb 18, 2018 10:01 pm

KlangFool wrote:
Sun Feb 18, 2018 9:55 pm
What equity? How much do you lose by not investing the down payment? How much do you lose by mortgage interest?

Klangfool
So are you against homeownership? Or do you simply favor the least costly form of housing one can tolerate?
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Mlm » Sun Feb 18, 2018 10:13 pm

I really don't think one more year will make any meaningful difference long term. The stock market or the housing market could go up or it could go down in one year. If you can afford the payments and you have a plan to be prepared for the future you should be good to go.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Sun Feb 18, 2018 10:24 pm

willthrill81 wrote:
Sun Feb 18, 2018 10:01 pm
KlangFool wrote:
Sun Feb 18, 2018 9:55 pm
What equity? How much do you lose by not investing the down payment? How much do you lose by mortgage interest?

Klangfool
So are you against homeownership? Or do you simply favor the least costly form of housing one can tolerate?
willthrill81,

I am against folks overspending on their housing.

A) It so happened that they are most likely to overspend on housing when they buy. They are less likely to do that by renting.

B) Even if they overspend on renting, it is not a long-term commitment like buying. They are less likely to be financially destroyed.

KlangFool

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Epsilon Delta » Sun Feb 18, 2018 11:11 pm

I have to vote for A. There is no way the principle payment for B is greater than the $2,250 that A is saving, even if you figure in tax deductions for interest and property taxes. A also gets some earnings because he holds on to any down payment..

The only way B can come out ahead is there is rapid increases in property prices during the year so A has to pay much more for the house.

On the other hand buying a house is not purely a financial decision. It's also a life style choice, and you also have to figure how likely it is a similar property will be on sale in a year. If you can afford it the extra cost of buying need not rule out buying.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by raisinsaregrapes » Sun Feb 18, 2018 11:28 pm

I started doing the calcs in excel. Turns out there are a lot of variables to see who gets ahead over the 30 years, stock returns, interest rates, fluctuating rent and housing prices, cost basis and taxes. One year will make a small difference that any changes in these variables can swing it either way....probably A though.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by zazzoo195 » Sun Feb 18, 2018 11:44 pm

Doesn’t this basically boil down to whether it’s better to invest $2250/mo or ~$1100/mo (principal payment) for 12 months? There are some other complications; for example tax savings from being able to itemize, property taxes, and so on, but that seems like the gist.

The real world of course doesn’t work this way. Mortgage rates and home prices change in 12 months. I’d guess for someone who can afford a $4800 mortgage payment, this will be an irrelevant difference in 30 years.
Last edited by zazzoo195 on Sun Feb 18, 2018 11:48 pm, edited 1 time in total.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Nate79 » Sun Feb 18, 2018 11:47 pm

raisinsaregrapes wrote:
Sun Feb 18, 2018 11:28 pm
I started doing the calcs in excel. Turns out there are a lot of variables to see who gets ahead over the 30 years, stock returns, interest rates, fluctuating rent and housing prices, cost basis and taxes. One year will make a small difference that any changes in these variables can swing it either way....probably A though.
Why would you stop your calculations at 30 years? Does yoir need for housing stop in 30 years? Suppose you buy a house at 30 years old on a 30 year fixed. Unless you die at 60 you need to run the numbers until your need for housing stops. Now run the numbers on a 15 year fixed.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by broslami » Mon Feb 19, 2018 12:59 am

I think it depends on what you'll be doing with the difference and also what interest rates will be 7-8 months from now, among other factors.

Wages are going up which it hasn't in a long time. Sounds great, except that means inflation is picking up since everyone's getting more money such chasing after less goods. The economy is great right now, but interest rates are and will rise further because of inflation. And predictably the Fed will push us all into a recession. Could happen a year from now or a few years from now, but that's kind of how the cycle goes.

If interest rates go up a lot then you're going to see problems with affordability which will put downward pressure on house prices. So let's say that happens between now and then or there's some other crazy unforseen event, you could be better off buying later since maybe house prices will collapse. Or maybe prices keep going up and humming along in which case maybe getting in now is better. Or interest rates go up and house prices go up in which case it's getting more expensive.

So it really depends on a lot of unforseen things which we'll only know the correct answer to in hindsight.

Maybe just go with your gut and what feels right since honestly its kind of unknowable, IMHO.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Chuffly » Mon Feb 19, 2018 1:38 am

Why not figure it out for yourself? Here's a good source to get you started:

https://www.nytimes.com/interactive/201 ... lator.html

You might be overthinking this. The way to think through this problem is to determine whether it's better to buy or rent today. If the latter, you should rent for the next year. If the former, you buy now. Ceteris paribus, of course. The 12 month lag should be an irrelevant variable in this analysis, since we don't know how this home's price with appreciate in comparison to stock/bond investments. You'll simply have the same analysis to make the next year.*

I suspect the answer to this is to probably rent for the next year, from a strictly financial perspective, but there are a lot of variables at play that you haven't filled us in on. It's probably best to run the numbers yourself. Speaking intuitively based on the wide discrepancy between the two payments, I imagine the opportunity cost of not building (home) equity in the rent situation is likely more than offset by the opportunity cost of not building (stock market) equity with the extra mortgage money being paid in the home-ownership situation (this always seems to be the case when I run the numbers for my own situation and deal with much narrower spreads). Furthermore, I'm guessing you'll be dropping a big fat down payment on this house, and that, too, will also not be getting invested in the stock market.

I will note that when Robert Shiller, inventor of the Case-Shiller Housing Index, was asked about whether people should buy a house, his response was that one shouldn't buy a home because it's a great financial investment (he's of the opinion that it's not), but that one should buy a home because they want to buy a home. If this is a house you really want, and your finances can handle it, maybe you should just buy the house. After all, not every decision in life needs to be about maximizing your financial outcome.

*Edit - This might not be quite true ... in a rising rate environment, the point being made about the higher monthly payments is a valid one. That said, this could have something of a depressive effect on house prices, although I would imagine at that price range, probably not nearly enough to offset the higher mortgage. And while the rising interest rate scenario could perhaps tilt this in favor of "buy now", there's no guarantee that interest rates do, in fact, rise as fast as is projected ... what if the economy goes into a tailspin in the second half of the year and the fed cuts rates? We have been in an extended period without a recession. Economic forecasting has always been fraught with difficulty ...
Last edited by Chuffly on Mon Feb 19, 2018 1:52 am, edited 3 times in total.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Epsilon Delta » Mon Feb 19, 2018 1:44 am

raisinsaregrapes wrote:
Sun Feb 18, 2018 11:28 pm
I started doing the calcs in excel. Turns out there are a lot of variables to see who gets ahead over the 30 years, stock returns, interest rates, fluctuating rent and housing prices, cost basis and taxes. One year will make a small difference that any changes in these variables can swing it either way....probably A though.
Most of these are irrelevent to the OPs choices. The difference between the two choices is only in the first year, so you only need to look at the difference in the first year.

You should consider any savings in the first year to be put into an increased down payment. Considering the stock market is equivalent to considering if a smaller down payment is better. A smaller down payment may be better, but that is a different decision, which could be made either today or next year.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by gotester2000 » Mon Feb 19, 2018 1:59 am

If you have the money and want a long term house, then there is no point to wait for a year. Buy a house per your needs - not too less, nor too much.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by FrankLUSMC » Mon Feb 19, 2018 7:43 am

On a 30 year mortgage you really don't gain much equity if you plan on selling in 10 years. That would depend on market appreciation of the house, it could go up or it could bust. I've been a homeowner since 1980, have had 3 homes. I love the homes I've had, but have paid lots of interest too.
If you want to own, just do it. If you are waffling about a year, then you may not be ready for it.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by tmcc » Mon Feb 19, 2018 8:51 am

One of the things that people are missing in this equation is the ability to purchase for the same price 12 months from now

It may not be possible get the same purchase price basis down the road. In that situation, buy now is the obvious winner unless the bottom falls out.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Mon Feb 19, 2018 10:18 am

tmcc wrote:
Mon Feb 19, 2018 8:51 am
One of the things that people are missing in this equation is the ability to purchase for the same price 12 months from now

It may not be possible get the same purchase price basis down the road. In that situation, buy now is the obvious winner unless the bottom falls out.
tmcc,

Or, we will hit a recession between now and 2019. Hence, the price will be lowered.

https://en.wikipedia.org/wiki/List_of_r ... ted_States

Historically, there is at least one US recession every 10 years since 1836. The last recession was 2007/2009. We are overdue for a recession.

KlangFool

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by tmcc » Mon Feb 19, 2018 10:23 am

But that would be market timing :D

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by KlangFool » Mon Feb 19, 2018 10:26 am

tmcc wrote:
Mon Feb 19, 2018 10:23 am
But that would be market timing :D
tmcc,

You assume that the house's price will go up in one year. That is market timing too.

KlangFool

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by JGoneRiding » Mon Feb 19, 2018 11:41 am

What is a doing with the extra and what is the real or presumed roi.? Without that who knows it's all a guessing game.

If a decides to rent for ever at that rate adjusted for inflation and invests the difference in the stock market at some "real rate of return" most likely on the numbers a will win. But what if the house b buys is in a super hot area and instead of doing as is average for real estate and just keeping up with inflation the house does double inflation and then b retired some where cheaper?? These are all things we don't know to really determine.

So the real question is does b get more life satisfaction out of buying now and if so then buy. We did and don't regret, the great unknown was weather something we wanted would still be there in a year and the answer in hind sight was we probably made a good decision yo buy when we did but numberswise to start it was questionable

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by davidsorensen32 » Mon Feb 19, 2018 11:41 am

I second KF. Goal should be FI, not house ownership. Try to move to a rent-controlled apartment if you're worried about housing costs.
KlangFool wrote:
Sun Feb 18, 2018 10:24 pm
willthrill81 wrote:
Sun Feb 18, 2018 10:01 pm
KlangFool wrote:
Sun Feb 18, 2018 9:55 pm
What equity? How much do you lose by not investing the down payment? How much do you lose by mortgage interest?

Klangfool
So are you against homeownership? Or do you simply favor the least costly form of housing one can tolerate?
willthrill81,

I am against folks overspending on their housing.

A) It so happened that they are most likely to overspend on housing when they buy. They are less likely to do that by renting.

B) Even if they overspend on renting, it is not a long-term commitment like buying. They are less likely to be financially destroyed.

KlangFool

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Mon Feb 19, 2018 3:46 pm

davidsorensen32 wrote:
Mon Feb 19, 2018 11:41 am
Goal should be FI, not house ownership.
It is very presumptuous for anyone to tell the OP what his/her goals should be. He may value home ownership more than FI.
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by LadyGeek » Mon Feb 19, 2018 5:24 pm

The "buy vs. rent" preference and the use of these funds is an individual decision. Please stay focused on helping the OP, which is:
TheBogleWay wrote:
Sun Feb 18, 2018 7:29 pm
So, here's my question. All other factors removed, just this simple math, which person would come out financially ahead?

Person A) is renting for $2,550/month and continues renting for 12 more months, and then buys a home with a mortgage with a total mortgage related monthly cost of $4,800/mo at a 30 year loan, standard rates.

Person B) Same as person A, except they buy the home with a $4,800 cost now, instead of waiting 12 months.

Long term, would person B come out ahead? I'm not sure, but they may because they are actually gaining equity vs person A who while they pay less, isn't gaining any equity.

Person A and B both have an income that can easily cover the payment and has enough for 20% down after selling some stocks.
TheBogleWay wrote:
Sun Feb 18, 2018 8:04 pm
And actually, I have a separate question I’m wondering about too.

Just simple math, long term, would a person be more well off financially renting for $2,550/mo, or if they bought a home but the 30 year mortgage payment was $4,800/mo?

I can’t tell because while the rent is cheaper, there’s zero equity.

This home was built 3 years ago so no repairs will be needed. I’d live there for 10 years or so maybe less.
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Mon Feb 19, 2018 7:39 pm

Thanks Ladygeek ^

and thank the rest of you too, you're all very helpful. I showed someone else this thread and she said she was surprised how people who don't know me will go out of their way to type of lengthy responses with no personal gain. That's why I love forums.




Anyway, after all these questions, somebody came in last night and put a cash offer on the house at a number I wasn't comfortable beating so this house is gone, but that's ok, now I can move a bit slower and more calculated. Appreciate all your feedback.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by supalong52 » Mon Feb 19, 2018 8:26 pm

It's easy to get caught up emotionally when buying a house. There's always the fear that you will miss out and so there's a tendency to rush into it. Don't. There's a reason you were thinking about buying in a year. Stick to that plan and don't get swept away.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by willthrill81 » Mon Feb 19, 2018 11:40 pm

TheBogleWay wrote:
Mon Feb 19, 2018 7:39 pm
Thanks Ladygeek ^

and thank the rest of you too, you're all very helpful. I showed someone else this thread and she said she was surprised how people who don't know me will go out of their way to type of lengthy responses with no personal gain. That's why I love forums.

Anyway, after all these questions, somebody came in last night and put a cash offer on the house at a number I wasn't comfortable beating so this house is gone, but that's ok, now I can move a bit slower and more calculated. Appreciate all your feedback.
Well at least you know that this was not the house for you, and the decision was out of your hands. That simplifies things.

I'd really recommend that you save that difference between your rent and your 'almost-was' mortgage payment. You can invest it for your other financial goals, apply it as an additional downpayment when you do buy a house, or use it for some other purpose. Just don't let it inflate your lifestyle.

Cheers. :beer
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by itstoomuch » Tue Feb 20, 2018 12:48 am

Person A) is renting for $2,550/month and continues renting for 12 more months, and then buys a home with a mortgage with a total mortgage related monthly cost of $4,800/mo at a 30 year loan, standard rates.

Person B) Same as person A, except they buy the home with a $4,800 cost now, instead of waiting 12 months.

Long term, would person B come out ahead? I'm not sure, but they may because they are actually gaining equity vs person A who while they pay less, isn't gaining any equity.
In the Seattle region, 'B' will come out ahead. Seattle region has a projected ~7+% increase for 2018. The last 5 years the real increases has been +12% compounding. There is a severe shortage of SFH, condos, TH in Seattle. If you like something now, there is no guarantee that you will find something next year or even next month. Then there is interest rate uncertainty. Thus a future purchase maybe, probably, could, be more expensive to purchase, has an higher borrowing cost, and you may not find what you really want :confused . PLUS, you will be bidding against the likes of me. We are converting variable stocks/bonds/cash to RE's cashflow, appreciation, tax depreciation, and a way to pass forward to heirs, tax free assets. :dollar :annoyed
Just like buying individual stocks. :twisted:
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Re: Looking for some help and fast (buying vs renting, net worth)

Post by msk » Tue Feb 20, 2018 2:04 am

Actually, the original post presented an unrealistic proposition. We have no clue how the market situation will be one year from now, never mind in 30 years. The chap who was willing to rent out the presumably fancy house (so the owner was probably not a financial ignoramus) was willing to rent it out at what may look like a rent that was too low, probably wishes to hold onto the house expecting significant house-price appreciation. Some people are even willing to keep a house vacant because their view of the market is different from that of the OP (market will be static over the next year). One will be proven wrong while the other will profit. We may have OPINIONS if we know the local market, but all arithmetically based responses are based on a static market that may or may not materialize. It's far more certain that the market will either rise or fall in one year, never mind a longer period. Or did the house owner offer a rent-to-buy contract as presented? Even then, the resulting outcome, positive or negative, has little to do with arithmetic.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Cycle » Tue Feb 20, 2018 2:37 am

KlangFool wrote:
Sun Feb 18, 2018 8:31 pm

B) That means both (A) and (B) are not rich enough to be Financially Independent yet. And, they choose to be "House Poor" and spend a lot more on housing.

The question is very simple.
At the OPs income level 330k, I'd consider myself house poor with that high of housing costs. Most people are not prodigous accumulators of wealth, and are happy delaying FI in exchange for some luxuries.

Two points to not ignore are cost of house sale, as it's rare to hold a property for 30 years, and real appreciation or in most instances deflation. Also big ticket items like a roof, painting, and new appliances can be factored into the housing costs.

It ends up being a bit of a gamble as appreciation and early sale are the two biggest factors and difficult to predict.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Tamarind » Tue Feb 20, 2018 5:56 am

supalong52 wrote:
Mon Feb 19, 2018 8:26 pm
It's easy to get caught up emotionally when buying a house. There's always the fear that you will miss out and so there's a tendency to rush into it. Don't. There's a reason you were thinking about buying in a year. Stick to that plan and don't get swept away.
This. The house is never as special as you think.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by tmcc » Tue Feb 20, 2018 6:43 am

Tamarind wrote:
Tue Feb 20, 2018 5:56 am
supalong52 wrote:
Mon Feb 19, 2018 8:26 pm
It's easy to get caught up emotionally when buying a house. There's always the fear that you will miss out and so there's a tendency to rush into it. Don't. There's a reason you were thinking about buying in a year. Stick to that plan and don't get swept away.
This. The house is never as special as you think.
The house is irrelevant. The location is paramount. If its a new construction development where they are pumping these things out, I'd agree that another year +/- won't make a difference. In select markets, a year could be everything. :oops:

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by TheBogleWay » Tue Feb 20, 2018 4:13 pm

Cycle wrote:
Tue Feb 20, 2018 2:37 am


At the OPs income level 330k, I'd consider myself house poor with that high of housing costs. Most people are not prodigous accumulators of wealth, and are happy delaying FI in exchange for some luxuries.
Can you help me understand how we'd be "house poor" with this? I'm not asking out of defensiveness, just asking to protect myself.

With a monthly income of say $28k before taxes, that leaves us... let's assume $19k after taxes. If all mortgage related costs are $4,800, that means every month outside of our main expense (living expenses) we'd have $14,200/month for other expenses. We're pretty low-key people outside of a home, I imagine all other costs would be about $3k/month leaving us with over $11,200/month in random saving money.

How is this house poor? Please let me know so I don't make a mistake.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by unclescrooge » Tue Feb 20, 2018 6:03 pm

willthrill81 wrote:
Mon Feb 19, 2018 3:46 pm
davidsorensen32 wrote:
Mon Feb 19, 2018 11:41 am
Goal should be FI, not house ownership.
It is very presumptuous for anyone to tell the OP what his/her goals should be. He may value home ownership more than FI.
Indeed, that is definitely true of my wife.

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Re: Looking for some help and fast (buying vs renting, net worth)

Post by Cycle » Tue Feb 20, 2018 7:08 pm

TheBogleWay wrote:
Tue Feb 20, 2018 4:13 pm
Cycle wrote:
Tue Feb 20, 2018 2:37 am


At the OPs income level 330k, I'd consider myself house poor with that high of housing costs. Most people are not prodigous accumulators of wealth, and are happy delaying FI in exchange for some luxuries.
Can you help me understand how we'd be "house poor" with this? I'm not asking out of defensiveness, just asking to protect myself.

With a monthly income of say $28k before taxes, that leaves us... let's assume $19k after taxes. If all mortgage related costs are $4,800, that means every month outside of our main expense (living expenses) we'd have $14,200/month for other expenses. We're pretty low-key people outside of a home, I imagine all other costs would be about $3k/month leaving us with over $11,200/month in random saving money.

How is this house poor? Please let me know so I don't make a mistake.
House poor for me and I use the term in an exaggerated manner, as a millionaire is not poor in any sense of the word, ymmv

In Minnesota, housing can be very inexpensive or very expensive, it's a factor of luxury. In hcola, optimizing your housing costs will be very difficult.

We moved out of our 200k condo to owner occupy a duplex in a blue collar neighborhood. We save 162k on 270k of income. Our housing expenses last year were roughly 9k (major expenses: 2k taxes, $3k repairs, $2k maintenance) plus free self-labor.

But we have a sitting asset cost in our duplex unit of 150k, figure 4% of lost returns is 6k, so total housing costs is 15k per year. These numbers would be higher but some are expensed against rental income.

If instead of spending $15k, I were spending 30.5k on rent or 56k on a bank financed house, our savings per year would be reduced to roughly 130k per year and I would have to delay my FIRE date 2-3 years... Which is a 20-30% delay. I consider this delay to be completely unacceptable as I have a lot to do in retirement and limited time.

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