1.1 mil house for rent for $2,850/mo. Worth it to rent?

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californiadude
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1.1 mil house for rent for $2,850/mo. Worth it to rent?

Post by californiadude » Mon Jul 05, 2010 7:56 pm

House is for sale for $1,074,500. Mortgage would cost $4,352 per month. It's offered for rent at $2,850.

More facts:

- I have around $250,000 in my non-retirement accounts.
- I make a good income (around $10,000) per month, but it's a "stock" job rather than a "bond" job, if that makes sense.
- The rent includes furnishings plus utilities (water, trash, electric, gas, cable, high speed internet and gardener)

What would you do in this situation? Thanks in advance!

P.S. Please assume in this scenario that finding a less expensive place to live is not an option.
Last edited by californiadude on Mon Jul 05, 2010 8:07 pm, edited 1 time in total.

livesoft
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Post by livesoft » Mon Jul 05, 2010 8:06 pm

Sounds too expensive to me. We make more money, but our mortgage + utilties is about half that expense. So since you asked what would I do in this situation, ... I would find a less expensive place, preferably half the cost all-in.

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californiadude
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Post by californiadude » Mon Jul 05, 2010 8:07 pm

livesoft wrote:Sounds too expensive to me. We make more money, but our mortgage + utilties is about half that expense. So since you asked what would I do in this situation, ... I would find a less expensive place, preferably half the cost all-in.
Please assume, for the sake of this question, that finding a less expensive place is not an option.

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gatorking
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Post by gatorking » Mon Jul 05, 2010 8:08 pm

Why exactly are you comparing the sale price to rent?
More important questions to ask are: does the house meet you requirements in terms of location, ease of commute, size, maintenance, etc.
Last edited by gatorking on Mon Jul 05, 2010 8:08 pm, edited 1 time in total.

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Post by LadyGeek » Mon Jul 05, 2010 8:08 pm

Welcome to the Bogleheads forum. You'll need to supply more information, as the previous posts have mentioned. For additional insight, please see Owning vs Renting on the Bogleheads Wiki.

Be sure to skim through the forum discussions referenced at the bottom of the page.
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Post by livesoft » Mon Jul 05, 2010 8:15 pm

californiadude wrote:Please assume, for the sake of this question, that finding a less expensive place is not an option.
You are telling me this is the cheapest place to rent. Then there is no other option since all other places are more expensive. I have to ask, why ask this question then?

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Post by californiadude » Mon Jul 05, 2010 8:18 pm

gatorking wrote:Why exactly are you comparing the sale price to rent?
More important questions to ask are: does the house meet you requirements in terms of location, ease of commute, size, maintenance, etc.
Yes; hence the request that you assume that finding a cheaper place is not an option.

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californiadude
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Post by californiadude » Mon Jul 05, 2010 8:20 pm

livesoft wrote:
californiadude wrote:Please assume, for the sake of this question, that finding a less expensive place is not an option.
You are telling me this is the cheapest place to rent. Then there is no other option since all other places are more expensive. I have to ask, why ask this question then?
Because the place meets our required location, ease of commute, minimum size, maintenance, etc.
Last edited by californiadude on Mon Jul 05, 2010 8:24 pm, edited 1 time in total.

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Post by californiadude » Mon Jul 05, 2010 8:22 pm

LadyGeek wrote:Welcome to the Bogleheads forum. You'll need to supply more information, as the previous posts have mentioned.
What additional information do you need? Thanks in advance.

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Post by Allan » Mon Jul 05, 2010 8:22 pm

Californiadude:

I think it is a bargain, especially considering that furnishings and utilities (and I assume insurance) are included. Of course I say that without knowing anything about the actual house or the location, but if it is really a million$ house, is decently located, in good condition, it does sound like a good deal.

Whether it works for you financially, is another question.

Allan

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Post by gatorking » Mon Jul 05, 2010 8:25 pm

So the place meets all your requirements and is the lowest rent around, but you still want our approval?

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Post by ted123 » Mon Jul 05, 2010 8:28 pm

I changed my mind about this post.

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Post by mda42 » Mon Jul 05, 2010 8:33 pm

Sounds like a good deal. Main question I would have is whether the owner might default on the mortgage. If they don't have much equity or are upside down, they might walk away.

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Post by robert2008 » Mon Jul 05, 2010 8:35 pm

The question can be answered two ways:

1. Which is a better deal, buying or renting, disregarding yoru personal situation?

2. Which is better in your personal situation?

I'd say the answer to both is rent.

For question 1, you can look at the price:rent ratio (rent is annual rent). For this house, the ratio is at least 31.4 (one could argue you should subtract the value of furniture utilities and gardner to compute the ratio). Generally, that's considered high (i.e. house is overvalued) though it varies by location (if you're in the East Bay it may be okay.) Google "price to rent ratio" to find articles describing this measure and see where it is historically for your neck of the woods.

For question 2, unless there's other income from a spouse you're not mentioning, rent is the only option. Your debt:income ratio wold be 44% not counting property taxes or insurance, and it sounds like your income may be variable. Three years ago you woud have gotten a mortgage no problem, but if you can find a bank that will write such a mortgage today let me know so I can short the stock. Even forgetting the mortgage qualification issue, the key question is how long do you want to stay? If a few years at most, renting is definitley better. If 30 years, then buying may be worth it if you can afford it and if it is priced right.

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Post by californiadude » Mon Jul 05, 2010 8:38 pm

gatorking wrote:So the place meets all your requirements and is the lowest rent around, but you still want our approval?
Sorry if I was unclear. My question is not, should I rent? My question is, should I rent or should I buy? Thanks very much in advance.

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Post by tim1999 » Mon Jul 05, 2010 8:46 pm

Relative to the possible value of the home, it sounds like a great rental price. In my area, homes worth half of that rent for similar prices, and usually don't include utilities and maintenance, and certainly not furnishings.

I am almost wondering what the "catch" is.

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Post by gatorking » Mon Jul 05, 2010 8:48 pm

californiadude wrote:
gatorking wrote:So the place meets all your requirements and is the lowest rent around, but you still want our approval?
Sorry if I was unclear. My question is not, should I rent? My question is, should I rent or should I buy? Thanks very much in advance.
Rent.

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Post by LadyGeek » Mon Jul 05, 2010 9:05 pm

californiadude wrote:What additional information do you need? Thanks in advance.
I think you supplied it in the subsequent posts.
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Post by joruva » Tue Jul 06, 2010 12:35 am

I find it funny that in a recent thread a point was made that it's always better to buy because the landlord would never rent a house without positive cash flow.

In actuality, the owner's costs may be significantly less than if you were to buy the house today. Maybe they refinanced over the years, or property values shot up. Could be a number of other factors. Looks like running the numbers wins again.

I would rent, but try to lock in a value for maximum future rent increases. I did this on my current apartment: 1 year lease with second year option, maximum 10% increase after that.

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Post by tim1999 » Tue Jul 06, 2010 5:18 am

joruva wrote:I find it funny that in a recent thread a point was made that it's always better to buy because the landlord would never rent a house without positive cash flow.
Yeah I don't agree with that point. I could drive you around my town and show you hundreds of rentals that likely aren't cash flow positive. Either because the owner paid too much during the bubble, didn't put much down, the tenants aren't paying, it's an older building with expensive upkeep and utilities, etc.

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Re: 1.1 mil house for rent for $2,850/mo. Worth it to rent?

Post by thedude » Tue Jul 06, 2010 5:57 am

Deleted.

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Post by californiadude » Tue Jul 06, 2010 6:57 am

Thanks to everyone who answered my question. You gave me some valuable information, including the price to rent ratio, whether there might be some "catch" here, and the need to lock in a value for maximum future rent increases.

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Post by Sally » Tue Jul 06, 2010 7:22 am

Rent! If I have interpreted correctly re your characterization of your job as being "stock" vice "bond," your job stability is somewhat volatile. Besides, based on the limited information available, IMHO, on your income you really can't afford to buy this house.

Mortgage is $4352 per month. Add in utilities, trash, cable, internet, along with maintenance, repairs, etc. and you won't have much left after you pay for this especially if your $10K per month is gross income (before taxes)!

It may "meet your needs" but look at the numbers (and your emergency fund amounts) carefully especially if your job isn't very stable/safe.

Good luck!

Note: Normally I would advocate buying; but, buying generally means you get smaller, not quite as fancy a house than one that you can rent.

Sally

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Post by edge » Tue Jul 06, 2010 8:13 am

californiadude wrote:Thanks to everyone who answered my question. You gave me some valuable information, including the price to rent ratio, whether there might be some "catch" here, and the need to lock in a value for maximum future rent increases.
You need somewhere between 250 and 300k/yr in stable income to afford a house like that.

I would def. rent, both because its a pretty good deal and second because you probably can't actually afford to own the house.

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Post by Indices » Tue Jul 06, 2010 8:30 am

If the house sells, I would be worried that you will be thrown out by the owner if you are renting. Of course in this market the house will probably never sell. Just a thought though!

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Re: 1.1 mil house for rent for $2,850/mo. Worth it to rent?

Post by DSInvestor » Tue Jul 06, 2010 8:58 am

californiadude wrote:House is for sale for $1,074,500. Mortgage would cost $4,352 per month. It's offered for rent at $2,850.
Does the mortgage payment include property tax? If not, you can expect to add another 11-12K/yr ($1000/month)for property tax in California. Then add insurance, utilities, trash, repairs etc. It could get to $6000/month to own this place which would be more 60% of gross income and almost all of take home pay. The numbers do not work out to buy the home.

Renting is the better option financially but there is some risk that you may be asked to leave if the house sells.

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Post by Ted Valentine » Tue Jul 06, 2010 9:04 am

californiadude wrote:Thanks to everyone who answered my question. You gave me some valuable information, including the price to rent ratio, whether there might be some "catch" here, and the need to lock in a value for maximum future rent increases.
My first thought on the "catch" was that this house could be foreclosed on soon and you could be kicked out with little to no notice. I have read stories about this happening to house renters. Can you get assurances that the mortgage is current and the house is not in preforclosure?

My second thought was the house was haunted. :lol:
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.

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Post by Judsen » Tue Jul 06, 2010 9:09 am

Perhaps you could negotiate a rent with option to buy offer. It doesn't hurt to test the opportunity to accommodate mutual needs.
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Post by speakertown » Tue Jul 06, 2010 10:55 am

Ted Valentine wrote: My first thought on the "catch" was that this house could be foreclosed on soon and you could be kicked out with little to no notice. I have read stories about this happening to house renters. Can you get assurances that the mortgage is current and the house is not in preforclosure?
Dont know how it is in california

here house gets foreclosed on.

as long as you pay rent and keep your end of lease

the next owner must honor the previous contract.
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Post by LiveFreeorDie » Tue Jul 06, 2010 11:15 am

Sounds like Cali already has his mind made up that this place is for him. :P

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Post by ej76az » Tue Jul 06, 2010 11:16 am

Compare the list price to the value on Zillow. If the borrower is underwater, there's a good chance you'll eventually be evicted by the new owner who buys the property through a pre-foreclosure short sale, at a foreclosure auction, or as a post-foreclosure REO. I don't know CA law, but typically a foreclosure trumps a lease. You don't want to deal with the cost and hassle of moving, only to be forced to move out after a few months. Then again, lenders are delaying foreclosures and delaying approval of short sales, with some delinquent borrowers staying in the property for 2 years, so maybe you wouldn't get kicked out for a long time. Or maybe the new owner would be an investor and would want you to stay as a tenant.

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Post by Alex Frakt » Tue Jul 06, 2010 11:35 am

Rent.

In a situation like this, it's a good idea to invest the difference between the rent and what it would cost to own (mortgage + property taxes) on top of what you already save. This way you'll be building up both your downpayment and your knowledge of what you really can afford.

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foreclosure protection to renter

Post by Keltset » Tue Jul 06, 2010 7:35 pm

If I recall was there not a protect the renter foreclosure act of 2009? If the house goes under the renter in theory has some immunity for now i think...

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Re: 1.1 mil house for rent for $2,850/mo. Worth it to rent?

Post by sommerfeld » Tue Jul 06, 2010 8:10 pm

californiadude wrote:P.S. Please assume in this scenario that finding a less expensive place to live is not an option.
Finding a less expensive place is always an option.

If you eventually want to own a house, then it makes sense to live frugally in a non-ideal rental for a few years while you save up cash for a downpayment on the dream house.

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Post by realitytruthprozac » Tue Jul 06, 2010 11:34 pm

Rent it. It's a steal. Only buy when its CHEAPER to buy. When I bought my property, it was about 25% less than renting. Now, it's worth at least 50% more than my purchase price. WIN/WIN.

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Re: 1.1 mil house for rent for $2,850/mo. Worth it to rent?

Post by grayfox » Wed Jul 07, 2010 12:32 am

californiadude wrote:House is for sale for $1,074,500. Mortgage would cost $4,352 per month. It's offered for rent at $2,850.

More facts:

- I have around $250,000 in my non-retirement accounts.
- I make a good income (around $10,000) per month, but it's a "stock" job rather than a "bond" job, if that makes sense.
- The rent includes furnishings plus utilities (water, trash, electric, gas, cable, high speed internet and gardener)

What would you do in this situation? Thanks in advance!

P.S. Please assume in this scenario that finding a less expensive place to live is not an option.
If the question is RENT or BUY.

Total cost of rental $2850.
Total cost of owning 4352 + taxes, insurance, untilities, maintenance, repairs, HOA, etc, etc = how much $6500 per month??

6500 / 2850 = 2.28x

It cost twice as much to own than to rent. This, BTW, is normal for southern California. It would only make sense to buy if you are expecting gigantic increases in house prices during the time you own it. (How long will that be 5 or 10 years?)

With all the factors I'm not going to get into, seems more likely that house prices will fall in southern California. That house needs to come down in price massively to be competitive with rent prices

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Post by HockeyMike35 » Wed Jul 07, 2010 6:47 am

At 120K a year you can not come close to paying a 800K mortgage. The only option you have if you want to live there is to rent. 350K - 400K would be pushing it.

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Post by anthau » Wed Jul 07, 2010 8:40 am

Though I think the consensus is already clear to rent, it's also worth noting that Bill Bernstein would agree: In The Investor's Manifesto, Dr. Bernstein writes, "A good rule of thumb is to never, ever, pay more than 15 years fair rental value for any residence." (p. 37).
Best, | | Anth

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Post by Splash » Wed Jul 07, 2010 11:53 am

I would research this property carefully before signing any rental agreement. It sounds as if it is in a desireable area. As it appears to be priced substantially below market value, I would be concerned that the owners/landlords are not paying the mortgage and are otherwise pocketing your rent.

There are multiple reports of renters being evicted without recourse due to undisclosed mortgage defaults/foreclosures/short sales by the owners.

I would research this thoroughly before signing any legal document.

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Post by Cosmo » Wed Jul 07, 2010 2:30 pm

Question for the OP:

1) Would the house be still for sale if you choose to rent it?
2) If so, why would you make a decision to rent when ultimately you will be forced out when it is purchased?

Cosmo

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Post by swaption » Thu Jul 08, 2010 11:57 am

joruva wrote:I find it funny that in a recent thread a point was made that it's always better to buy because the landlord would never rent a house without positive cash flow.

In actuality, the owner's costs may be significantly less than if you were to buy the house today. Maybe they refinanced over the years, or property values shot up. Could be a number of other factors. Looks like running the numbers wins again.

I would rent, but try to lock in a value for maximum future rent increases. I did this on my current apartment: 1 year lease with second year option, maximum 10% increase after that.
Likely making reference to my comment in another post and also twisting words. Please show me where anyone ever said it is always better to buy than rent, and even further for the reasons that you reference. Anomalies will always exist, particularly when the market breaks down. In this case, it obviously makes sense to rent as there would appear to be some form of arbitrage. But there is no reason to expect this to persist indefinitely. At some point supply/demand/prices adjust. Perhaps the owner gets religion and realizes they would be better off selling at $750k than renting out at this level.

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Post by Splash » Thu Jul 08, 2010 4:25 pm

The house is for sale? Oh. That changes everything.

No way I would rent a house that is for sale. EVen though sales might be very sluggish, you don't really have any rights if the house is sold/foreclosed/short saled out from under you.

This forum might give you some ideas about rental parity. The may also have links to your real estate market, if it isn't Orange County.

http://www.irvinehousingblog.com/

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