Considerations for Rent v Buying for 4-year stay

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
InvisibleAerobar
Posts: 355
Joined: Mon Jan 15, 2018 12:33 pm

Considerations for Rent v Buying for 4-year stay

Post by InvisibleAerobar » Wed Apr 03, 2019 6:54 pm

I'm pretty sure that renting would be better, but just want to double check

As mentioned in another thread, my partner and I will be moving to another state (Madison, WI), so she can start a 4-year professional degree. While the rent of a comparable place would be cheaper than our current arrangement (a 2BR goes for ~$1,200, vs. $1,600 at my current apt. complex, for something of similar condition). I'm not sure I want to live in these places, not the least b/c neither of us can be bothered dealing with issues surrounding old houses/apartments, not to mention headaches of dealing with undergrads who surely would be our neighbors.

As I work full time from home and will have the same job post-move), I would also really like my office in a separate room(right now using up a good portion of the living room). I currently max-out my pre-tax retirement savings, Roth IRA, and HSA, and my post-tax saving is ~23% of my $120k base salary. The places we would like to rent (read, newer apartments) likely cost $1,800/month for a 2BR (with utilities extra), with private rentals available for $1,600. A comparable place to buy (happens to be in the same building as a $1,600 private rental) would be ~$300k, with annual taxes ~$6k (the rate is par for the course for the county) and HOA of $3,600/yr.

I've run the calculations, and the interest, taxes, insurance, and HOA on this place would be ~$69k on a 15 year and $76k on a 30 year. And this is before we account for closing cost (at least 2.5%) on buying and commission when selling (at least 5.5%), so a total of at least another $24k in real estate transactional cost, so both a 15-yr mortgage and a 30-yr. What makes me somewhat uncomfortable with buying is that the prices here have gone up at a really good clip the past 4 years (averaging ~9% per year), but prior to that, the housing market took a beating during the recession. Some of the units in this building (completed in 2006) saw losses of ~25-30% for those owners who sold between 2009 and 2012. In other words, i could get either really lucky or really unlucky, depending on what happens in the next four years. The somewhat wild swing, plus the short duration of stay, makes me think that it'd be a really bad idea to buy. Of course, buying would cost less even with sustained 3% year-on-year increase, but there's no guarantee that would happen. The population of the city hasn't increased that much (averaging ~1.4%/year for the last decade), though there have been more high-paying jobs available in the area.

So with all that said, which way should I lean? I would suspect most to recommend that we rent. If so, what seems like a good upper bound for rent? Would a good starting point be assuming no housing appreciations and 2% yearly rent increases, and determine a value there? The "downside" to this approach is that it would "allow" us to spend more on rent; however, downside to assuming appreciation is that the appreciation may not occur at all.

If we stay as renters, I think we can still save at least ~$24k/year, even if I rent a place that's $2,000/month after utilities. Right now, we have $100k for down payment and closing, and i'd think that when we leave, we'd still like that amount largely preserved. What would be a reasonably sane way of allocating these funds so that we can take out $100-120k four year down the road without having to sell funds that may have depreciated?

As a side point, though housing appreciation is basically buying on margins, at least there's no capital gains tax when it comes to selling. The additional funds would all need to be allocated into a post-tax brokerage account. As such, should that affect the buy/rent assessment?

Another side point, other than buying at the bottom of the market, under what sort of conditions would it be wise to buy for a stay of 4-5 years?

Many thanks in advance!

PS. No need to address issues concerning tuition, as there's a separate source for that.
Last edited by InvisibleAerobar on Thu Apr 04, 2019 6:58 am, edited 1 time in total.

bloom2708
Posts: 6976
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Considerations for Rent v Buying for 4-year stay

Post by bloom2708 » Wed Apr 03, 2019 6:56 pm

4 years?

Rent.

Don't mess with all the home ownership stuff with a short window.

Up your rental budget and get a nicer place for the 4 years. You will still come out ahead.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by lack_ey » Wed Apr 03, 2019 7:07 pm

There's places where you could find a comparable house that would be more like $200k relative to that kind of rent with considerably lower HOA. It's not common, but the tail end of the distribution exists.

So you could break even in 3 years or less, after frictions and opportunity costs are taken into account on the house, assuming typical levels of house appreciation and (stock and bond) investment gains as a baseline case.

It's just not so much with more typical pricing.

What are the chances you end up staying in Madison?

boogiehead
Posts: 118
Joined: Wed Sep 27, 2017 11:45 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by boogiehead » Wed Apr 03, 2019 7:18 pm

InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm

Another side point, other than buying at the bottom of the market, under what sort of conditions would it be wise to buy for a stay of 4-5 years?
If you were a real estate agent, super handy with fixing stuff, its near bottom of the market, amazon has just announced that they will building hq3 in the area, then it'll probably be worth it to buy, otherwise rent 8-)

User avatar
leeks
Posts: 783
Joined: Thu Apr 07, 2011 4:33 pm
Location: new york

Re: Considerations for Rent v Buying for 4-year stay

Post by leeks » Wed Apr 03, 2019 7:20 pm

rent!

JGoneRiding
Posts: 1809
Joined: Tue Jul 15, 2014 3:26 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by JGoneRiding » Wed Apr 03, 2019 9:32 pm

Confession , I bought with my parents for my professional school. BUT we bought a 4 bed rented the other 3 for enough to cover piti

We got lucky as I graduated 2007. One year later would have been bad!

Our spread if rent vs coat was a lot better than yours. 200k house rented for $1200. You are adding 100k for only $400 more rent value

cresive
Posts: 346
Joined: Sat Nov 26, 2016 12:12 pm
Location: Virginia, USA
Contact:

Re: Considerations for Rent v Buying for 4-year stay

Post by cresive » Wed Apr 03, 2019 9:54 pm

InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm
I'm pretty sure that renting would be better, but just want to double check

As mentioned in another thread, my partner and I will be moving to another state (Madison, WI), so she can start a 4-year professional degree. While the rent of a comparable place would be cheaper than our current arrangement (a 2BR goes for ~$1,200, vs. $1,600 at my current apt. complex, for something of similar condition). I'm not sure I want to live in these places, not the least b/c neither of us can be bothered dealing with issues surrounding old houses/apartments, not to mention headaches of dealing with undergrads who surely would be our neighbors.

As I work full time from home and will have the same job post-move), I would also really like my office in a separate room(right now using up a good portion of the living room). I currently max-out my pre-tax retirement savings, Roth IRA, and HSA, and my post-tax saving is ~23% of my $120k base salary. The places we would like to rent (read, newer apartments) likely cost $1,800/month for a 2BR (with utilities extra), with private rentals available for $1,600. A comparable place to buy (happens to be in the same building as a $1,600 private rental) would be ~$300k, with annual taxes ~$6k (the rate is par for the course for the county) and HOA of $3,600/yr.

I've run the calculations, and the interest, taxes, insurance, and HOA on this place would be ~$69k on a 15 year and $76k on a 30 year. And this is before we account for closing cost on buying and commission when selling (so another $24k for each). What makes me somewhat uncomfortable with buying is that the prices here have gone up at a really good clip the past 4 years (averaging ~9% per year), but prior to that, the housing market took a beating during the recession. Some of the units in this building (completed in 2006) saw losses of ~25-30% for those owners who sold between 2009 and 2012. In other words, i could get either really lucky or really unlucky, depending on what happens in the next four years. The somewhat wild swing, plus the short duration of stay, makes me think that it'd be a really bad idea to buy. Of course, buying would cost less even with sustained 3% year-on-year increase, but there's no guarantee that would happen. The population of the city hasn't increased that much (averaging ~1.4%/year for the last decade), though there have been more high-paying jobs available in the area.

So with all that said, which way should I lean? I would suspect most to recommend that we rent. If so, what seems like a good upper bound for rent? Would a good starting point be assuming no housing appreciations and 2% yearly rent increases, and determine a value there? The "downside" to this approach is that it would "allow" us to spend more on rent; however, downside to assuming appreciation is that the appreciation may not occur at all.

If we stay as renters, I think we can still save at least ~$24k/year, even if I rent a place that's $2,000/month after utilities. Right now, we have $100k for down payment and closing, and i'd think that when we leave, we'd still like that amount largely preserved. What would be a reasonably sane way of allocating these funds so that we can take out $100-120k four year down the road without having to sell funds that may have depreciated?

As a side point, though housing appreciation is basically buying on margins, at least there's no capital gains tax when it comes to selling. The additional funds would all need to be allocated into a post-tax brokerage account. As such, should that affect the buy/rent assessment?

Another side point, other than buying at the bottom of the market, under what sort of conditions would it be wise to buy for a stay of 4-5 years?

Many thanks in advance!

PS. No need to address issues concerning tuition, as there's a separate source for that.
Looking at your numbers, I would almost call it a wash. Rule of thumb is you want 2+ years to make back your closing costs, etc. However, your numbers look like it may take a little longer. I am a pro-ownership person, but there are a LOT of hassles with owning a home. If you like DIY projects, having your own rules, doing anything you want and can tolerate mistakes, then buying is a good deal. If you want to build your business while your partner builds a GPA, then renting takes a LOT of burden off of you.

I like Suze Orman's rule; If you want a house (and you can afford it), buy a house. If you don't like owning, don't buy a house. Real estate isn't the investment it once was, and a 4-year window really won't matter too much. You can put your $100K into T-bills and make almost as much as a house would appreciate, and you won't have the taxes, repairs and other headaches.

Slacker
Posts: 721
Joined: Thu May 26, 2016 8:40 am

Re: Considerations for Rent v Buying for 4-year stay

Post by Slacker » Wed Apr 03, 2019 10:02 pm

InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm
...
And this is before we account for closing cost on buying and commission when selling (so another $24k for each)...
Purchasing closing costs are going to be nowhere near $24,000...even if you are using a VA loan, on your second home and paying the entire funding fee ahead of time. Try closer to $3000 for buying closing costs (worst case VA loan maybe $18,000).

Typical Real estate commissions won't be that high either (near 8% given maybe 3% per year appreciation). Try closer to $15,000 to $20,000 on sale of the property.

EDIT: Maybe your state is especially costly, I've only bought and sold in 3 states - so your numbers could be accurate if you've already done transactions of this nature.

DonIce
Posts: 733
Joined: Thu Feb 21, 2019 6:44 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by DonIce » Wed Apr 03, 2019 10:46 pm

Round trip cost of a real estate transaction (buy and sell) is about 10%. Housing goes up at about the pace of inflation (maybe faster maybe slower depending on the location) so you'll probably about break even after 4 years in nominal dollars. So you're basically just weighing the risk that the housing market in your area (or nationwide due to a market crash) will underpeform vs the enjoyment you get from living in a place you own.

Personally I'd rent. The month of hell on either end going through the mortgage closing and selling process isn't worth it for 4 years for me.

As for how much you should spend on rent, the answer is simple. The lowest amount that will get you a place that you and your partner find acceptable. There's no reason to spend more.

msk
Posts: 1399
Joined: Mon Aug 15, 2016 10:40 am

Re: Considerations for Rent v Buying for 4-year stay

Post by msk » Thu Apr 04, 2019 3:00 am

With RE it's always about location, in space and in time. Last time I was posted to a new location for 4 years (London UK), I could not believe that anyone would be so reckless and agree to giving a 90% mortgage to a foreigner like myself so I jumped in and bought a new home (10% down). Six weeks later house prices shot up 50% :mrgreen: In locations and times that are sane, that does not happen. Rent.

msk
Posts: 1399
Joined: Mon Aug 15, 2016 10:40 am

Re: Considerations for Rent v Buying for 4-year stay

Post by msk » Thu Apr 04, 2019 3:01 am

Double post, deleted

Topic Author
InvisibleAerobar
Posts: 355
Joined: Mon Jan 15, 2018 12:33 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by InvisibleAerobar » Thu Apr 04, 2019 6:54 am

thanks for everyone's response! I think that pretty much settles it :)

in an ideal situation, I think we'd prefer to rent from private party, as that would allow us not to worry about leases and such after the initial move-in
lack_ey wrote:
Wed Apr 03, 2019 7:07 pm
There's places where you could find a comparable house that would be more like $200k relative to that kind of rent with considerably lower HOA. It's not common, but the tail end of the distribution exists.

So you could break even in 3 years or less, after frictions and opportunity costs are taken into account on the house, assuming typical levels of house appreciation and (stock and bond) investment gains as a baseline case.

It's just not so much with more typical pricing.

What are the chances you end up staying in Madison?
good question; all depends on her job prospects. We'd love to stay, but a lot of it is out our hands

I always wonder how easy it is to find the tail end of distribution as you mention
boogiehead wrote:
Wed Apr 03, 2019 7:18 pm
InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm

Another side point, other than buying at the bottom of the market, under what sort of conditions would it be wise to buy for a stay of 4-5 years?
If you were a real estate agent, super handy with fixing stuff, its near bottom of the market, amazon has just announced that they will building hq3 in the area, then it'll probably be worth it to buy, otherwise rent 8-)
:)

how I wish I had the means to do all this back in 2011
Slacker wrote:
Wed Apr 03, 2019 10:02 pm
InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm
...
And this is before we account for closing cost on buying and commission when selling (so another $24k for each)...
Purchasing closing costs are going to be nowhere near $24,000...even if you are using a VA loan, on your second home and paying the entire funding fee ahead of time. Try closer to $3000 for buying closing costs (worst case VA loan maybe $18,000).

Typical Real estate commissions won't be that high either (near 8% given maybe 3% per year appreciation). Try closer to $15,000 to $20,000 on sale of the property.

EDIT: Maybe your state is especially costly, I've only bought and sold in 3 states - so your numbers could be accurate if you've already done transactions of this nature.
good catch; I meant $24k for the total of closing cost + sales commissions, for both 15 year and 30 year; edited to clarify
DonIce wrote:
Wed Apr 03, 2019 10:46 pm
Round trip cost of a real estate transaction (buy and sell) is about 10%. Housing goes up at about the pace of inflation (maybe faster maybe slower depending on the location) so you'll probably about break even after 4 years in nominal dollars. So you're basically just weighing the risk that the housing market in your area (or nationwide due to a market crash) will underpeform vs the enjoyment you get from living in a place you own.

Personally I'd rent. The month of hell on either end going through the mortgage closing and selling process isn't worth it for 4 years for me.

As for how much you should spend on rent, the answer is simple. The lowest amount that will get you a place that you and your partner find acceptable. There's no reason to spend more.
yep, that basically sums it up well

the other thing is that as we are young (34 for me, 29 for her), if we move the down payment money into a 70/30 mix, and that money tanks 20% right around 4-5 years in the future when we might need to buy, we don't actually have to realize the lost and can afford to ride it out. Here, we'd need to sell and realize the lost when we no longer need the place, as HOA + taxes is $10k/year. The advantage offered by a 10-yr stay (more likely for return over the duration to match an average) is that we'd be more likely to break even after 10-yrs.

User avatar
lthenderson
Posts: 4375
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: Considerations for Rent v Buying for 4-year stay

Post by lthenderson » Thu Apr 04, 2019 7:50 am

Make sure you include in your cost of home ownership the financial cost of having to replace a HVAC system on its last legs, fix water damage from a ruptured pipe, a roof that starts leaking and a myriad of other things that could possibly go wrong and cost large amounts of money in four years.

No way I would do anything but rent for a term of four years, even if your rent was double what you are expecting.

liberty53
Posts: 45
Joined: Sat Oct 18, 2014 7:31 am
Location: Boston Area

Re: Considerations for Rent v Buying for 4-year stay

Post by liberty53 » Thu Apr 04, 2019 5:47 pm

The financial trade-offs for rent vs buy may be determined quite accurately by the NY Times rent vs by calculator:

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

Not sure why we don't pin the link somewhere since these questions come up all the time.

Topic Author
InvisibleAerobar
Posts: 355
Joined: Mon Jan 15, 2018 12:33 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by InvisibleAerobar » Thu Apr 04, 2019 6:07 pm

liberty53 wrote:
Thu Apr 04, 2019 5:47 pm
The financial trade-offs for rent vs buy may be determined quite accurately by the NY Times rent vs by calculator:

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

Not sure why we don't pin the link somewhere since these questions come up all the time.
I used that calculator (and have it bookmarked), but it is nothing more than a good starting point, and I find it lacking for the following reasons:

-1) It assumes that itemized deduction would be better for any user, which just isn't true most of the time. I have to adjust marginal tax rate to zero to remove effects of it accounting for mortgage interest and property tax deductions.

-2) It's also really hard to understand, when the advice is given in the form of "it'd be better to rent, if one finds a place for this price"

-3) The costs are not itemized in a sensible fashion. Every part constituting PITI gets lumped into recurring costs, whereas certain parts of that is true cost, while principal is not cost.

-4) It's a calculator, devoid of advice on financial common sense and prudence (which is why one would come to this forum). Even when one assumes a low-ish 1.5-2% return on home value, buying becomes the sensible option. What it doesn't tell you are the risks of loss of capital. As mentioned above, if I invest the down payment into 70/30, and the market takes a 30% beating four years from now, i'm not compelled to sell, and it's just paper loss (especially for someone my age). If the home price takes a 10% loss four years from now, it's actualized.

liberty53
Posts: 45
Joined: Sat Oct 18, 2014 7:31 am
Location: Boston Area

Re: Considerations for Rent v Buying for 4-year stay

Post by liberty53 » Thu Apr 04, 2019 6:18 pm

InvisibleAerobar wrote:
Thu Apr 04, 2019 6:07 pm
liberty53 wrote:
Thu Apr 04, 2019 5:47 pm
The financial trade-offs for rent vs buy may be determined quite accurately by the NY Times rent vs by calculator:

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

Not sure why we don't pin the link somewhere since these questions come up all the time.
I used that calculator (and have it bookmarked), but it is nothing more than a good starting point, and I find it lacking for the following reasons:

-1) It assumes that itemized deduction would be better for any user, which just isn't true most of the time. I have to adjust marginal tax rate to zero to remove effects of it accounting for mortgage interest and property tax deductions.

-2) It's also really hard to understand, when the advice is given in the form of "it'd be better to rent, if one finds a place for this price"

-3) The costs are not itemized in a sensible fashion. Every part constituting PITI gets lumped into recurring costs, whereas certain parts of that is true cost, while principal is not cost.

-4) It's a calculator, devoid of advice on financial common sense and prudence (which is why one would come to this forum). Even when one assumes a low-ish 1.5-2% return on home value, buying becomes the sensible option. What it doesn't tell you are the risks of loss of capital. As mentioned above, if I invest the down payment into 70/30, and the market takes a 30% beating four years from now, i'm not compelled to sell, and it's just paper loss (especially for someone my age). If the home price takes a 10% loss four years from now, it's actualized.
I guess you are arguing that taking random advice from forum posts is better than a calculator that allows you to test sensitivity to variables. For example, the rent vs buy decision is heavily dependent on expected investment return on the opportunity cost of the down payment. I don't agree that that a lowish 1.5%-2% return makes buying more sensible. It all depends on the numbers used.

The calculator is usually an eye opener for most people. Many people don't understand the opportunity cost of putting 20% down on an expensive house, or have and understanding of the benefits of leverage.

The calculator does a great job of handling the most common rent vs buy problems, and like anything doesn't handle every edge case one may run into.

Trader Joe
Posts: 1283
Joined: Fri Apr 25, 2014 6:38 pm

Re: Considerations for Rent v Buying for 4-year stay

Post by Trader Joe » Thu Apr 04, 2019 7:03 pm

InvisibleAerobar wrote:
Wed Apr 03, 2019 6:54 pm
I'm pretty sure that renting would be better, but just want to double check

As mentioned in another thread, my partner and I will be moving to another state (Madison, WI), so she can start a 4-year professional degree. While the rent of a comparable place would be cheaper than our current arrangement (a 2BR goes for ~$1,200, vs. $1,600 at my current apt. complex, for something of similar condition). I'm not sure I want to live in these places, not the least b/c neither of us can be bothered dealing with issues surrounding old houses/apartments, not to mention headaches of dealing with undergrads who surely would be our neighbors.

As I work full time from home and will have the same job post-move), I would also really like my office in a separate room(right now using up a good portion of the living room). I currently max-out my pre-tax retirement savings, Roth IRA, and HSA, and my post-tax saving is ~23% of my $120k base salary. The places we would like to rent (read, newer apartments) likely cost $1,800/month for a 2BR (with utilities extra), with private rentals available for $1,600. A comparable place to buy (happens to be in the same building as a $1,600 private rental) would be ~$300k, with annual taxes ~$6k (the rate is par for the course for the county) and HOA of $3,600/yr.

I've run the calculations, and the interest, taxes, insurance, and HOA on this place would be ~$69k on a 15 year and $76k on a 30 year. And this is before we account for closing cost (at least 2.5%) on buying and commission when selling (at least 5.5%), so a total of at least another $24k in real estate transactional cost, so both a 15-yr mortgage and a 30-yr. What makes me somewhat uncomfortable with buying is that the prices here have gone up at a really good clip the past 4 years (averaging ~9% per year), but prior to that, the housing market took a beating during the recession. Some of the units in this building (completed in 2006) saw losses of ~25-30% for those owners who sold between 2009 and 2012. In other words, i could get either really lucky or really unlucky, depending on what happens in the next four years. The somewhat wild swing, plus the short duration of stay, makes me think that it'd be a really bad idea to buy. Of course, buying would cost less even with sustained 3% year-on-year increase, but there's no guarantee that would happen. The population of the city hasn't increased that much (averaging ~1.4%/year for the last decade), though there have been more high-paying jobs available in the area.

So with all that said, which way should I lean? I would suspect most to recommend that we rent. If so, what seems like a good upper bound for rent? Would a good starting point be assuming no housing appreciations and 2% yearly rent increases, and determine a value there? The "downside" to this approach is that it would "allow" us to spend more on rent; however, downside to assuming appreciation is that the appreciation may not occur at all.

If we stay as renters, I think we can still save at least ~$24k/year, even if I rent a place that's $2,000/month after utilities. Right now, we have $100k for down payment and closing, and i'd think that when we leave, we'd still like that amount largely preserved. What would be a reasonably sane way of allocating these funds so that we can take out $100-120k four year down the road without having to sell funds that may have depreciated?

As a side point, though housing appreciation is basically buying on margins, at least there's no capital gains tax when it comes to selling. The additional funds would all need to be allocated into a post-tax brokerage account. As such, should that affect the buy/rent assessment?

Another side point, other than buying at the bottom of the market, under what sort of conditions would it be wise to buy for a stay of 4-5 years?

Many thanks in advance!

PS. No need to address issues concerning tuition, as there's a separate source for that.
Rent a duplex, not an apartment.

Post Reply