Buy the house or continue to rent?

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Topic Author
rosivel
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Buy the house or continue to rent?

Post by rosivel »

We have found a house that we both loved but it is priced a bit higher than we wanted.
Purchase price is 720k, looking to buy with 30 year mortgage, 20% down. House is in a HCOL area near Seattle. Excellent neighborhood with best schools and 5 minute commute to our work. Everything below that price is either very old or needs lots of work.
Currently renting a townhouse in the same area for 2200/mo. Our younger child is leaving to college next year (we may pay for it in full or contribute simnifically, since we did same for the older one).

Our financials ( both 48 years old):

Husband 175k salary, wife 86k.
Husband 401k , contributes 8%; Wife 170k with 20% contributon. No ROTH/IRA.

Total savings 830k.
Average total monthly expenses 7k, saving about the same monthly. No debt.

Is 720k a reasonable? Since we are in 24% tax bracket, is there any tax benefit from buying the house?

Any opinion/suggestion is very much appreciated!
chevca
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Re: Buy the house or continue to rent?

Post by chevca »

I'd say you guys can afford it easily.

Do you want to be homeowners or keep renting? We can't answer that for you. Affordability isn't really an issue, so up to you guys.

If you both love the house, go for it, IMO.
Topic Author
rosivel
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Re: Buy the house or continue to rent?

Post by rosivel »

Thank you for your response.
We have our doubts mainly because of our age- we may not be able to pay it off until retirement and the unknown of the market at time when we downgrade to retire.
chevca
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Re: Buy the house or continue to rent?

Post by chevca »

You can't control the future. :happy
Goal33
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Re: Buy the house or continue to rent?

Post by Goal33 »

rosivel wrote: Sun Aug 04, 2019 3:14 pm Thank you for your response.
We have our doubts mainly because of our age- we may not be able to pay it off until retirement and the unknown of the market at time when we downgrade to retire.
So this isn’t a house that you can “see yourself in forever”? Why not?
chevca
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Re: Buy the house or continue to rent?

Post by chevca »

That's a good point. I thought you both love the house? Why is there already a downgrade planned?
Topic Author
rosivel
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Re: Buy the house or continue to rent?

Post by rosivel »

We would love this house to be our forever one, but realistically we may not be able to afford the payments after we retire or if one of us loses its well paid job. We are both in aviation field and we may have to relocate if we lose our jobs. We are trying to plan for the worst case scenario.
medic
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Re: Buy the house or continue to rent?

Post by medic »

Looks like you can afford it, but doesn't sound like you should.
If worst case, then don't buy. Renting gives you flexibility.
If Boeing goes south for a bit, assume you'll see a lot of the houses in Renton/Everett up for sale so breaking even could be tough. You should at least expect to stay in the home for 7-10 years.

Family is getting smaller. Downsize considerations should be starting now especially if you're not sure you want to carry a $3K mortgage payment in 12-15 years.

The tax break on the mortgage probably won't mean much. It's now limited to something like $10K including state and local taxes (e.g sales). Your plan should be based on the raw numbers without looking at tax breaks and such which I consider minor variances.

Also know that the cost to own is more than just the mortgage. Assume 1-2% annually for maintenance. If you're going to struggle to make ends meet with the mortgage and college, then don't add to that stress with a home.
Dilbydog
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Re: Buy the house or continue to rent?

Post by Dilbydog »

medic wrote: Sun Aug 04, 2019 4:40 pm The tax break on the mortgage probably won't mean much. It's now limited to something like $10K including state and local taxes (e.g sales). Your plan should be based on the raw numbers without looking at tax breaks and such which I consider minor variances
SALT is capped at 10k. Mortgage interest is still deductible for mortgages under $750k, provided you itemize.
nura
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Re: Buy the house or continue to rent?

Post by nura »

Dilbydog wrote: Sun Aug 04, 2019 4:48 pm SALT is capped at 10k. Mortgage interest is still deductible for mortgages under $750k, provided you itemize.
If you itemize, you forgo 24k standard deduction; only for mortgage interest excess of $14k (assuming you max out on 10k SALT) you start getting tax breaks.
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Ben Mathew
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Re: Buy the house or continue to rent?

Post by Ben Mathew »

Can you go with a 15 year mortgage? Ideally, you would have paid off your mortgage by retirement. Given your savings rate, it doesn't seem impossible. The lower interest rate on the 15 year mortgage will help.
bloom2708
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Re: Buy the house or continue to rent?

Post by bloom2708 »

$2,200 seems like a good deal for rent if you like the place you are in now.

Owning will be much more with a $500k+ mortgage.

I am 48 too. I would keep renting. Stay flexible. Keep stashing cash and cash flow college. You are approaching the opponents 20 yard line. Don't fumble in the red zone.

We have one in college, one close to college and one farther away. I would downsize but my wife isn't ready. :wink:
Last edited by bloom2708 on Mon Aug 05, 2019 12:23 pm, edited 1 time in total.
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Sandtrap
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Re: Buy the house or continue to rent?

Post by Sandtrap »

rosivel wrote: Sun Aug 04, 2019 3:14 pm Thank you for your response.
We have our doubts mainly because of our age- we may not be able to pay it off until retirement and the unknown of the market at time when we downgrade to retire.
Looks good.
There's no "solid" reason not to buy a "home" you will enjoy, . . . *unless you value all the aspects of renting as much as homeownership.
But, there's no time like the present to enjoy homeownership.
Congratulations on your new home.
:sharebeer

j :happy
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KlangFool
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Re: Buy the house or continue to rent?

Post by KlangFool »

OP,

1) You could rent a house for $2,200 per month.

2) But, you want to increase your housing expense by buying a 700+K house.

3) And, your kids are leaving the house. So, you do not need the space.

4) Your net worth excluding the house is 800+K

Why are you doing this?

KlangFool
chevca
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Re: Buy the house or continue to rent?

Post by chevca »

I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
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elcadarj
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Re: Buy the house or continue to rent?

Post by elcadarj »

chevca wrote: Mon Aug 05, 2019 10:05 am I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
+1 Is this a good house for empty nesters? Do you anticipate frequent visitors? Or would you rather downsize to a pied-à-terre, have passport - will travel? (ETA) + Dump the home maintenance costs and bothers.
Topic Author
rosivel
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Re: Buy the house or continue to rent?

Post by rosivel »

chevca wrote: Mon Aug 05, 2019 10:05 am I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
I admit the house is a bit bigger than we need. Perhaps we should look for something smaller that we can pay off in 10-15 years. We were thinking to have a 30 year mortgage but with extra payments to pay it off as it is 15. Having smaller payment would give us piece of mind in case one becomes unemployed or something.
Great schools would probably hold the house value better than any other neighborhood in case of downturn.
We are tired of having our rent increase every year. Also we like the idea to be able to remodel, some yard would be nice too.
Our goal is to not have any house or rent payment in retirement, therefore planing the downgrade 10-15 years down the road.
KlangFool
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Re: Buy the house or continue to rent?

Post by KlangFool »

rosivel wrote: Mon Aug 05, 2019 1:34 pm
chevca wrote: Mon Aug 05, 2019 10:05 am I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
I admit the house is a bit bigger than we need. Perhaps we should look for something smaller that we can pay off in 10-15 years. We were thinking to have a 30 year mortgage but with extra payments to pay it off as it is 15. Having smaller payment would give us piece of mind in case one becomes unemployed or something.
Great schools would probably hold the house value better than any other neighborhood in case of downturn.
We are tired of having our rent increase every year. Also we like the idea to be able to remodel, some yard would be nice too.
Our goal is to not have any house or rent payment in retirement, therefore planing the downgrade 10-15 years down the road.
rosivel,

<< Our younger child is leaving to college next year (we may pay for it in full or contribute simnifically, since we did same for the older one).>>

Can you pay for your kid's college education if you buy the house?

<<We are tired of having our rent increase every year.>>

At your monthly rent of $2,200 per month, it would have to be tripled in order to justify buying the house.

<< Our goal is to not have any house or rent payment in retirement, therefore planing the downgrade 10-15 years down the road.>>

Can you retire if you buy the house? Have you run the numbers?

A) Your annual expense will go up by about 30K per year.

B) You have to pay for your kid's college education. How much is that?

<<Having smaller payment would give us piece of mind in case one becomes unemployed or something>>

You have the peace of mind when you rent.

KlangFool
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Nestegg_User
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Re: Buy the house or continue to rent?

Post by Nestegg_User »

gonna have to agree with the general consensus:

you've already put the kids through school, so no "need" for the school district (except, as you say, to help keep up property value) and have also said that, being in the aviation industry (...and we've all seen the effects of the MAX on B's bottom line)....you may need to relocate to continue in your career

You are entering the "danger zone" age-wise for careers, at age 48 (see other threads on that).... and your rent is very good for the area and lets you put money towards retirement. Renting gives you flexibility; others that might want to be able to transfer, if situation requires, would be tied down with the house (and as noted above, if there's a total relocation of that company, it will have an affect on that market). It also appears that you don't mind the rental (even rent increases of $100/month wouldn't change the calculation relative to the cost of owner-occupied)....and are only FOMO on houses.

In reality, you can have it the best of both:
The increase in standard deduction gives you more ability to save, especially since you don't need to think about the cap on SALT ( which in your case, with no state tax, means even more benefit).
You can consider where you want to retire, unconstrained with the job location. The money saved in the intervening years might allow you to purchase with cash.... and not have to be paying for upkeep, taxes, etc.
The current location might turn out to be poor if, for some reason, all the kids wind up in a totally different part of the country and you wanted to be closer... having the flexibility to change won't come at a high cost relative to that for selling the house.

Keep renting!
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3CT_Paddler
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Re: Buy the house or continue to rent?

Post by 3CT_Paddler »

rosivel wrote: Sun Aug 04, 2019 1:11 pm We have found a house that we both loved but it is priced a bit higher than we wanted.
Purchase price is 720k, looking to buy with 30 year mortgage, 20% down. House is in a HCOL area near Seattle. Excellent neighborhood with best schools and 5 minute commute to our work. Everything below that price is either very old or needs lots of work.
Currently renting a townhouse in the same area for 2200/mo. Our younger child is leaving to college next year (we may pay for it in full or contribute simnifically, since we did same for the older one).

Our financials ( both 48 years old):

Husband 175k salary, wife 86k.
Husband 401k , contributes 8%; Wife 170k with 20% contributon. No ROTH/IRA.

Total savings 830k.
Average total monthly expenses 7k, saving about the same monthly. No debt.

Is 720k a reasonable? Since we are in 24% tax bracket, is there any tax benefit from buying the house?

Any opinion/suggestion is very much appreciated!
I am guessing that the $144k downpayment is coming out of the $830k in savings? That would leave you with approx. $690k in savings close to 50 at a large company that is going through real struggles and has a history of layoffs.

Your payment would be around $3,300/mo. It sounds like rent/buy is tilted much more towards rent in your part of Seattle.

My vote would be to save, save, save and continue to maintain your flexibility.
jsullivan
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Re: Buy the house or continue to rent?

Post by jsullivan »

I'm going through a similar "buy vs rent" analysis and numbers wise I keep coming up with Rent even though my rent payment is substantially higher then yours (similar buy price), if I could find a similar housing situation at your price I would be more focused on trying to get a longer term rental agreement in place. Maybe you could sign a longer lease and lock in the raise so it doesn't sting so much each year?
bloom2708
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Re: Buy the house or continue to rent?

Post by bloom2708 »

rosivel wrote: Mon Aug 05, 2019 1:34 pm ....Also we like the idea to be able to remodel, some yard would be nice too.
If you want to feel what a remodel is like, just dig a hole in the back yard and dump some money in. Cover it up, then uncover it in several weeks and put some more money in. :shock: :wink:

I have been mowing every 4 days all summer. I'd like less yard about this time of the summer.

Good luck with your decision.
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Lee_WSP
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Re: Buy the house or continue to rent?

Post by Lee_WSP »

There's this new 5% rule that is a fast and easy rent/buy calculation. It assumes that the total unrecoverable costs of ownership equals about 5% each year. 1% maintenance/upgrades; 1% taxes & other stuff; and the rest is made up of opportunity costs from the down payment and interest on the loan and some other things I cannot remember. Here's the link: https://www.pwlcapital.com/rent-or-own- ... me-5-rule/

At 720k, this puts the monthly rent at $3k. $2,200 seems like a bargain in comparison.

Now, do I personally believe this 5% rule? Not necessarily because at least 1% and up to 2% of it is opportunity costs (but being bogleheads we probably would have put that money to work in the market), but the inputs the creators use are about right. It's definitely at least 3% annual unrecoverable costs associated with home ownership plus all the PITA items such as plumbing, electrical, garage door malfunctions, painting, appliances, etc.
chevca
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Re: Buy the house or continue to rent?

Post by chevca »

rosivel wrote: Mon Aug 05, 2019 1:34 pm
chevca wrote: Mon Aug 05, 2019 10:05 am I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
I admit the house is a bit bigger than we need. Perhaps we should look for something smaller that we can pay off in 10-15 years. We were thinking to have a 30 year mortgage but with extra payments to pay it off as it is 15. Having smaller payment would give us piece of mind in case one becomes unemployed or something.
Great schools would probably hold the house value better than any other neighborhood in case of downturn.
We are tired of having our rent increase every year. Also we like the idea to be able to remodel, some yard would be nice too.
Our goal is to not have any house or rent payment in retirement, therefore planing the downgrade 10-15 years down the road.
While probably true the schools may hold housing values better, it's definitely not a reason to tie yourself to a bigger more expensive house than you need. Especially if you don't have kids that will be going to the schools. Anywhere near by this great school area is going to go up or down with the housing market. Maybe not exactly as much, but they're going to be pretty similar.

If you pick a nice house you both love that is what you need now, in the future, and can stay put for a long time, you don't need to care about a downturn anyway.

You should have been looking for this nice big house in a great school district, oh, about 18-20 years ago from the sounds of things. But, that has come and gone. You have quite different needs for housing now, and you have a good opportunity to find something to keep for a long time. The time to downsize is when the kids are gone and you have retirement in sight. You don't need to downsize though. You can buy the smaller house now. Or, keep renting until retirement is closer and then decide where you want to buy.
Lee_WSP
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Re: Buy the house or continue to rent?

Post by Lee_WSP »

chevca wrote: Mon Aug 05, 2019 4:36 pm
rosivel wrote: Mon Aug 05, 2019 1:34 pm
chevca wrote: Mon Aug 05, 2019 10:05 am I did wonder that also. Why the big house in the neighborhood with great schools, and that will need to be downsized later as the kids are about to be out of the house?
I admit the house is a bit bigger than we need. Perhaps we should look for something smaller that we can pay off in 10-15 years. We were thinking to have a 30 year mortgage but with extra payments to pay it off as it is 15. Having smaller payment would give us piece of mind in case one becomes unemployed or something.
Great schools would probably hold the house value better than any other neighborhood in case of downturn.
We are tired of having our rent increase every year. Also we like the idea to be able to remodel, some yard would be nice too.
Our goal is to not have any house or rent payment in retirement, therefore planing the downgrade 10-15 years down the road.
While probably true the schools may hold housing values better, it's definitely not a reason to tie yourself to a bigger more expensive house than you need. Especially if you don't have kids that will be going to the schools. Anywhere near by this great school area is going to go up or down with the housing market. Maybe not exactly as much, but they're going to be pretty similar.

If you pick a nice house you both love that is what you need now, in the future, and can stay put for a long time, you don't need to care about a downturn anyway.

You should have been looking for this nice big house in a great school district, oh, about 18-20 years ago from the sounds of things. But, that has come and gone. You have quite different needs for housing now, and you have a good opportunity to find something to keep for a long time. The time to downsize is when the kids are gone and you have retirement in sight. You don't need to downsize though. You can buy the smaller house now. Or, keep renting until retirement is closer and then decide where you want to buy.
School district rankings can and do change as well. It's definitely an important factor to look at when renting (possibly one of the most important after price), but not so guaranteed when looking at a 10 or 20 year timeline. Especially since no school aged children will be attending the schools.
international001
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Re: Buy the house or continue to rent?

Post by international001 »

1900–2017 the global real return for real estate (net of inflation) was 1.3%, while stocks returned 5.2% after inflation
I find those claims arguable. STocks return are usually 6-7%, real state appreciation around 0% (depending on area)

USe something more accurate and play with your own assumptions: https://www.nytimes.com/interactive/201 ... lator.html

In general, if you are in a LCL area, you can expect prices to remain with inflation and get great returns from imputed rental. Returns are historically close to stocks. This is why is great being able to invest in a house with leverage (think on imputed rental as a steady return)

If income return (return to price) is not that great, then you may be better renting and investing what you save on stock market.

Of course, you have to compare apples to apples. It seems you are looking to buy a better house than you are renting.

It's important also to look for worst case scenario. If you have to sell your house, how soon can you sell it? If it's the biggest house in the neighborhood, chances are it may take longer.
cherijoh
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Re: Buy the house or continue to rent?

Post by cherijoh »

rosivel wrote: Sun Aug 04, 2019 1:11 pm We have found a house that we both loved but it is priced a bit higher than we wanted.
Purchase price is 720k, looking to buy with 30 year mortgage, 20% down. House is in a HCOL area near Seattle. Excellent neighborhood with best schools and 5 minute commute to our work. Everything below that price is either very old or needs lots of work.
Currently renting a townhouse in the same area for 2200/mo. Our younger child is leaving to college next year (we may pay for it in full or contribute simnifically, since we did same for the older one).

Our financials ( both 48 years old):

Husband 175k salary, wife 86k.
Husband 401k , contributes 8%; Wife 170k with 20% contributon. No ROTH/IRA. <-- Your composite weighted retirement savings rate is 12% which is on the low side for high earners like yourselves.

Total savings 830k. <--- Would the down payment come out of this number? Does it include your 401k balance? Does it include an emergency fund, money set aside for college, etc. or is it only taxable investments towards retirement?
Average total monthly expenses 7k, saving about the same monthly. No debt. <-- Do your expenses include taxes or is that a separate item?
Is 720k a reasonable? Since we are in 24% tax bracket, is there any tax benefit from buying the house?
Any opinion/suggestion is very much appreciated!
Principal and interest alone on the mortgage will be higher than your current rent. Add in property taxes, HO insurance, HOA dues (if applicable) and a reserve for home maintenance and you will suck up a great what you are currently setting aside after 401k contributions and expenses.

Unless you have some money set aside for your younger child that you didn't mention, you are also planning to cash flow college for 4 years.

Depending on what your $830K in savings includes (e.g., 401k balances, emergency fund, house downpayment) you may also be woefully behind on saving for a retirement that would maintain your current standard of living. Buying an expensive house when you will soon be empty nesters doesn't seem like a good idea at all IMO. Especially if you are thinking about downsizing when you retire.

Do you like this house enough to risk coming up short on your other finanical goals? If either of you lost your job during the next financial downturn, buying the house could put you in a very precarious position, as many people discovered during the Great Recession.
cherijoh
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Re: Buy the house or continue to rent?

Post by cherijoh »

rosivel wrote: Sun Aug 04, 2019 4:19 pm We would love this house to be our forever one, but realistically we may not be able to afford the payments after we retire or if one of us loses its well paid job. We are both in aviation field and we may have to relocate if we lose our jobs. We are trying to plan for the worst case scenario.
If you are planning for the "worst case scenario" then continue to rent! :oops:

It appears like you are double or maybe even triple dipping on your future excess cash flow:
  • Continue to save for retirement (with lots of tax-advantaged space that you are not currently using)
  • Cash flow your daughter's college costs
  • Increase your current housing costs to make minimum mortgage payment (and other housing costs like taxes, insurance, maintenance, etc.)
  • make extra principal payments to pay down the loan
IMO you need to put pencil to paper and work out a budget for the next few years and see how much you can actually afford!
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rosivel
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Re: Buy the house or continue to rent?

Post by rosivel »

cherijoh wrote: Mon Aug 05, 2019 5:19 pm
rosivel wrote: Sun Aug 04, 2019 1:11 pm
Husband 401k is about 420k, contributes 8%; Wife 170k with 20% contribution. No ROTH/IRA. <-- Your composite weighted retirement savings rate is 12% which is on the low side for high earners like yourselves.
We realize that, but we started late, coming to USA in our late 30's with 4k debt and in the first couple of years we were not high earners
Total savings 830k. <--- Would the down payment come out of this number? Does it include your 401k balance? Does it include an emergency fund, money set aside for college, etc. or is it only taxable investments towards retirement?
Yes, the downpayment and child's college funding is coming from the 830k. Our 401k accounts (about 590k combined) are separate and we are not planning to touch those. We are counting on small pensions from our company too.
Average total monthly expenses 7k, saving about the same monthly. No debt. <-- Do your expenses include taxes or is that a separate item?
7k is our total averaged monthly spending that includes taxes, rent, living expenses, vacations, travel and etc. We can probably easily scale it down if needed

Depending on what your $830K in savings includes (e.g., 401k balances, emergency fund, house downpayment) you may also be woefully behind on saving for a retirement that would maintain your current standard of living. Buying an expensive house when you will soon be empty nesters doesn't seem like a good idea at all IMO. Especially if you are thinking about downsizing when you retire.

Do you like this house enough to risk coming up short on your other finanical goals?
The answer to that question as stated leans towards "NO".
Lee_WSP
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Re: Buy the house or continue to rent?

Post by Lee_WSP »

international001 wrote: Mon Aug 05, 2019 5:04 pm
1900–2017 the global real return for real estate (net of inflation) was 1.3%, while stocks returned 5.2% after inflation
I find those claims arguable. STocks return are usually 6-7%, real state appreciation around 0% (depending on area)

USe something more accurate and play with your own assumptions: https://www.nytimes.com/interactive/201 ... lator.html

In general, if you are in a LCL area, you can expect prices to remain with inflation and get great returns from imputed rental. Returns are historically close to stocks. This is why is great being able to invest in a house with leverage (think on imputed rental as a steady return)

If income return (return to price) is not that great, then you may be better renting and investing what you save on stock market.

Of course, you have to compare apples to apples. It seems you are looking to buy a better house than you are renting.

It's important also to look for worst case scenario. If you have to sell your house, how soon can you sell it? If it's the biggest house in the neighborhood, chances are it may take longer.
I've sliced and diced and sliced and diced using those calculators, but the reality is we cannot know the future. There's too many inputs and they're pretty complicated for even a sophisticated investor to really get a great handle on.

The unrecoverable costs method of attack is much simpler and easier to communicate and understand by everyone. Whether the inputs are off or not can be altered. If you say home appreciation will make the opportunity costs lower, than go with 4% unrecoverable costs. Or even three percent if you want to be edgy. Or go up to 6%. In my city, the unrecoverable costs will need to be closer to 4% for buying to be better than renting.
international001
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Re: Buy the house or continue to rent?

Post by international001 »

Well.. when something is too simple is also probably too wrong. Nothing wrong with the 'unrecoverable costs method', but it's too simple and will give you bad predictions (too much variance)

Play with the calculator w/o knowing the future. Just look at different scenarios and see sensitivity if assumptions change
KlangFool
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Re: Buy the house or continue to rent?

Post by KlangFool »

OP,

<<Husband 175k salary, wife 86k.
Husband 401k , contributes 8%; Wife 170k with 20% contributon. No ROTH/IRA.

Total savings 830k.
Average total monthly expenses 7k, saving about the same monthly. No debt.>>

<<Our 401k accounts (about 590k combined) are separate and we are not planning to touch those. We are counting on small pensions from our company too.>>

Your annual expense is 79K. You are at 1.4 million. You could be financially independent (FI) at about 2 million. You could max up both 401Ks with your money from your taxable account and save at current pace and reach your FI number in 5 years. Then, you could be free of the rat races in 5 years. If you do not need to work, you do not have to buy an expensive house near the workplace. You can buy a cheaper and bigger house elsewhere.

Please read the following link.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
cherijoh
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Location: Charlotte NC

Re: Buy the house or continue to rent?

Post by cherijoh »

rosivel wrote: Mon Aug 05, 2019 6:38 pm Husband 401k is about 420k, contributes 8%; Wife 170k with 20% contribution. No ROTH/IRA. <-- Your composite weighted retirement savings rate is 12% which is on the low side for high earners like yourselves.
We realize that, but we started late, coming to USA in our late 30's with 4k debt and in the first couple of years we were not high earners
That explains low balances, but not the savings rate into retirement savings vehicles. You have a fair amount of tax-advanged space going unused. How much of your savings (outside of 401ks) have you earmarked for retirement? At a safe withdrawal rate of 4%, your current 401k balances would support withdrawals of less than $2K/month from which you would also have to pay taxes. IMO, you also need to commit a big chunk of your "savings" balance towards retirement as well.
rosivel wrote: Mon Aug 05, 2019 6:38 pm Total savings 830k. <--- Would the down payment come out of this number? Does it include your 401k balance? Does it include an emergency fund, money set aside for college, etc. or is it only taxable investments towards retirement?
Yes, the downpayment and child's college funding is coming from the 830k. Our 401k accounts (about 590k combined) are separate and we are not planning to touch those. We are counting on small pensions from our company too.
Average total monthly expenses 7k, saving about the same monthly. No debt. <-- Do your expenses include taxes or is that a separate item?
7k is our total averaged monthly spending that includes taxes, rent, living expenses, vacations, travel and etc. We can probably easily scale it down if needed

Depending on what your $830K in savings includes (e.g., 401k balances, emergency fund, house downpayment) you may also be woefully behind on saving for a retirement that would maintain your current standard of living. Buying an expensive house when you will soon be empty nesters doesn't seem like a good idea at all IMO. Especially if you are thinking about downsizing when you retire.

Do you like this house enough to risk coming up short on your other finanical goals?
The answer to that question as stated leans towards "NO".

OK, the picture is not as bad as I originally assumed since $830K doesn't include $590K in 401ks. How much do you anticipate spending on college for your second child? I would immediately mentally lop that out of savings balance since it will be spent in the short-term and needs to be in safe low-risk investments.

If you continue to rent and save at your current rates then you would probably be bullet-proof against any future lay-offs - you could easily relocate to continue working or relocate to a lower COL area and retire on your savings. It sounds like you are both dependent on the same industry (and possibly the same company) which is an added risk.

If the worst were to happen, an expensive home becomes an albatross. During the Great Recession, I know a guy who turned down several job offers because he was underwater on his mortgage; had he been renting he would have been easily able to relocate.

During hard times, more expensive houses are normally harder to sell and suffer the biggest losses in terms of % value as well as actual $$. The fact that you are planning an exit strategy before you even buy the house argues against the purchase. Don't forget all the transaction costs related to buying and selling a house.
Lee_WSP
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Re: Buy the house or continue to rent?

Post by Lee_WSP »

international001 wrote: Tue Aug 06, 2019 6:48 am Well.. when something is too simple is also probably too wrong. Nothing wrong with the 'unrecoverable costs method', but it's too simple and will give you bad predictions (too much variance)

Play with the calculator w/o knowing the future. Just look at different scenarios and see sensitivity if assumptions change
Why? It’s no different than relying upon a calculator to try to push you one way or the other. Neither method will tell you whether you can afford the home. It just guesses whether buying or renting is clearly or not so clearly advantageous given current market conditions.
international001
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Re: Buy the house or continue to rent?

Post by international001 »

The equivalent rent for a given house you are planning to buy is the actual unrecoverable cost (what you pay for the enjoyment in the house)
Again, I think it's better to look at more variables/assumptions.
Lee_WSP
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Location: Arizona

Re: Buy the house or continue to rent?

Post by Lee_WSP »

international001 wrote: Thu Aug 08, 2019 1:38 pm The equivalent rent for a given house you are planning to buy is the actual unrecoverable cost (what you pay for the enjoyment in the house)
Again, I think it's better to look at more variables/assumptions.
The most involved buy/rent calculator is found here:

https://michaelbluejay.com/house/rentvsbuy.html

Once you start inputting the opportunity cost of the down payment, it becomes nearly impossible for buying to come out ahead in major cities. At least the major cities I've looked into.

I agree that the unrecoverable costs is simplistic, but going deep doesn't get you a better answer either. I think the final decision comes down to whether you actually want to be a home owner or not. What the value of actually owning the right to that land you're living on is worth to you. The ability & responsibility of owning and taking care of all that stuff.
rbaldini
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Re: Buy the house or continue to rent?

Post by rbaldini »

rosivel wrote: Sun Aug 04, 2019 1:11 pm Husband 175k salary, wife 86k.
Husband 401k , contributes 8%; Wife 170k with 20% contributon. No ROTH/IRA.
I know this is not what you asked, but I think most Bogleheads would agree that before you think of increasing your living expenses, you should be maxing out your 401Ks and IRAs (backdoor Roth in your case) if you can afford it. That would be just under 11% of husband's pay, and 22% of wife's take home pay. Then put $12k away each year for the Roth.

If you can't afford it, you probably shouldn't be buying a bigger house. In other words, from a pure financial perspective, tax-advantaged investing > house.

EDIT: evidently you are saving $7k * 12 = $84k per year, so you certainly can afford to max out 401k and Roths.
Last edited by rbaldini on Fri Aug 09, 2019 12:00 pm, edited 1 time in total.
rbaldini
Posts: 1436
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Re: Buy the house or continue to rent?

Post by rbaldini »

Lee_WSP wrote: Thu Aug 08, 2019 1:42 pm The most involved buy/rent calculator is found here:

https://michaelbluejay.com/house/rentvsbuy.html
A comparable one that I frequently recommend: https://www.nytimes.com/interactive/201 ... lator.html

Do play a bit with the numbers so you can get a sense of the range of outcomes.
international001
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Re: Buy the house or continue to rent?

Post by international001 »

Lee_WSP wrote: Thu Aug 08, 2019 1:42 pm
The most involved buy/rent calculator is found here:

https://michaelbluejay.com/house/rentvsbuy.html

Once you start inputting the opportunity cost of the down payment, it becomes nearly impossible for buying to come out ahead in major cities. At least the major cities I've looked into.

I agree that the unrecoverable costs is simplistic, but going deep doesn't get you a better answer either. I think the final decision comes down to whether you actually want to be a home owner or not. What the value of actually owning the right to that land you're living on is worth to you. The ability & responsibility of owning and taking care of all that stuff.
Yes, because they have a low Rent/price ratio. If it becomes good it's because housing value may appreciate beyond inflation. Personally, I wouldn't make that bet. If it was stocks, I would think market efficiency and compare a LCOL area is a stock dividend and a HCOL area is a growth stock. But I doubt efficiencies are the same in housing market. Plus, buying just one house is a huge bet (no diversification)

ps. My personal opinion is that housing prices in major cities will go down a lot in next centuries, but this is also especulation and beyond the point.
Golf maniac
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Re: Buy the house or continue to rent?

Post by Golf maniac »

A few things:
1. I would protect my retirement at all costs, I would do nothing to endanger that.
2. Kids going to college can be very expensive and take up a lot of your excess cash flow. May make sense to wait until you get a feel for these expenses.
3. If you work for Boeing or a company dependent on Boeing, we’ll need I say it? Do nothing to increase your debt level if that is true.
4. Buying a home is nothing more than a lifestyle, if you don’t have the craving to have that lifestyle don’t buy.
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