Buy or Rent under new Tax Law

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annthomas
Posts: 7
Joined: Sun Jan 14, 2018 1:23 pm

Buy or Rent under new Tax Law

Post by annthomas » Mon Feb 12, 2018 10:57 pm

All,

We are planning to buy a house somewhere in NJ close to NYC. Is it a good time to buy a house under the new tax law? Or Should we continue to Rent?Our maximum budget for the house is 750K - 800K. Please advise

Here is our situation
Combined Income :Around 250K
Tax Filing: MFJ
Location:NJ
Dependents : 9 months old son. Planning for another one after 2 years.

Investments:

$212k( 401k/R-IRA/Taxable)
$300k (All in Cash) ( 200K Saved for House down payment & associated costs + 100K is our emergency fund)
Last edited by annthomas on Mon Feb 12, 2018 11:10 pm, edited 3 times in total.

DVMResident
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Joined: Mon Aug 01, 2011 8:15 pm

Re: Buy or Rent under new Tax Law

Post by DVMResident » Mon Feb 12, 2018 11:00 pm

How much is your rent?
How long do you plan to stay in the area? Related, is your job stable?

annthomas
Posts: 7
Joined: Sun Jan 14, 2018 1:23 pm

Re: Buy or Rent under new Tax Law

Post by annthomas » Mon Feb 12, 2018 11:05 pm

DVMResident wrote:
Mon Feb 12, 2018 11:00 pm
How much is your rent?
How long do you plan to stay in the area? Related, is your job stable?
We are currently paying $2350 per month for a 2 Bed 2 Bath apartment. Job isn't that stable, but if we loose our job, we are confident that we can find another one in city(NYC)

Chris K Jones
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Joined: Sat Jan 20, 2018 6:54 pm

Re: Buy or Rent under new Tax Law

Post by Chris K Jones » Mon Feb 12, 2018 11:11 pm

Long term, I dont think the new tax law matters as much as the usual considerations for buying versus renting--its it likely you will stay there more than 4 or 5 years? Do you want to buy or rent? How are schools? What is better for your lifestyle and kids?

Agggm
Posts: 206
Joined: Mon Dec 25, 2017 6:18 pm

Re: Buy or Rent under new Tax Law

Post by Agggm » Mon Feb 12, 2018 11:17 pm

annthomas wrote:
Mon Feb 12, 2018 10:57 pm
All,

We are planning to buy a house somewhere in NJ close to NYC. Is it a good time to buy a house under the new tax law? Or Should we continue to Rent?Our maximum budget for the house is 750K - 800K. Please advise

Here is our situation
Combined Income :Around 250K
Tax Filing: MFJ
Location:NJ
Dependents : 9 months old son. Planning for another one after 2 years.

Investments:

$212k( 401k/R-IRA/Taxable)
$300k (All in Cash) ( 200K Saved for House down payment & associated costs + 100K is our emergency fund)
Your rent is low. Keep renting.

supersecretname
Posts: 65
Joined: Tue Sep 01, 2015 2:33 pm

Re: Buy or Rent under new Tax Law

Post by supersecretname » Mon Feb 12, 2018 11:17 pm

The best way to get an answer on the internet is to ask a different question.

You can’t afford a 750k house. Textbook house poor. Continue to rent.

DVMResident
Posts: 1247
Joined: Mon Aug 01, 2011 8:15 pm

Re: Buy or Rent under new Tax Law

Post by DVMResident » Mon Feb 12, 2018 11:40 pm

Assuming 20% down with a 30 year 4.5% fixed on a $800k house, your PI $3,242/mo plus tax $1,416/mo (assuming my googling if NJ taxes in correct) plus insurance, maintenance, utilities, and the opportunity cost of the down payment. Only <$1,000/mo in principle reduction for the first 5 years (at ~92% efficiency). All that ignores the deductions, but they're less with the new tax bill.

Renting is cheaper by a mile.

Nate79
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Location: Portland, OR

Re: Buy or Rent under new Tax Law

Post by Nate79 » Tue Feb 13, 2018 12:15 am

Is the current place you are renting the mid to long term plan or when you have another kid are you going to come back here and say your apartment is too small?

WanderingDoc
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Joined: Sat Aug 05, 2017 8:21 pm

Re: Buy or Rent under new Tax Law

Post by WanderingDoc » Tue Feb 13, 2018 12:17 am

DVMResident wrote:
Mon Feb 12, 2018 11:40 pm
Assuming 20% down with a 30 year 4.5% fixed on a $800k house, your PI $3,242/mo plus tax $1,416/mo (assuming my googling if NJ taxes in correct) plus insurance, maintenance, utilities, and the opportunity cost of the down payment. Only <$1,000/mo in principle reduction for the first 5 years (at ~92% efficiency). All that ignores the deductions, but they're less with the new tax bill.

Renting is cheaper by a mile.
NJ has dozens of counties and thousands of towns. All have different property taxes. Not sure what you "googled". Although in aggregate, NJ has above average property taxes. Plenty of towns with less than $1,400/mo. in property tax.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

likashing
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Joined: Tue Mar 06, 2007 7:58 pm

Re: Buy or Rent under new Tax Law

Post by likashing » Tue Feb 13, 2018 12:23 am

1) New tax law means buying is less advantageous than before in SALT states for people who could easily itemize previously. For your situation, SALT tax is capped at $10k. $24k standard deduction i.e. first $14k. mortgage interest is basically useless because you are getting $24k standard deduction without a mortgage anyway.

2) How much per year are you adding to your $300k cash? Do both you and your spouse work? With an income of $250k, if you are able to add $100k to the cash pile annually, IMHO you should keep renting until you can buy a place with a small enough mortgage, where you can survive on 1 income if one of you loses the job, especially when you are looking at places at $800k.

StealthRabbit
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Joined: Sat Jun 13, 2009 1:25 am

Re: Buy or Rent under new Tax Law

Post by StealthRabbit » Tue Feb 13, 2018 1:44 am

Rent for now, maybe forever.

Save a down payment to buy positive cash flowing real estate in a good market (a market that can provide strong and consistent returns). Doesn’t need to be residential. Look for 10%+ cap rates. NNN leases (tenant pays taxes, insurance, maint)

Build wealth (investment RE still offers tax benefits)
Establish inflation adjusted income to replace your wages (the sooner the better).
Being “stay at home Parents” was great, go back to work when the kids leave home. :sharebeer

As you are looking at that $800k home.... ask yourself “can I rent this joint out for $8k/ month”. And... “can I resell this place for 110% tomorrow?”. If answer to either is NO... keep renting, keep shopping.

RE (personal prop or investment) can tie you down forever. (Can take very long to resell, for a number of reasons)
Consider that before you sign. (And have a plan that covers financial obligations on that property. )

itstoomuch
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Location: midValley OR

Re: Buy or Rent under new Tax Law

Post by itstoomuch » Tue Feb 13, 2018 2:05 am

rent. Seattle region.
We recently had to buy because of a 1031 transaction. The renters will be getting a fantastic value in a new build, minisplit-hotwater heated floors. 360 views. We will make 3% ROI. stinks but we are looking at the long view of 20 years.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

DVMResident
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Joined: Mon Aug 01, 2011 8:15 pm

Re: Buy or Rent under new Tax Law

Post by DVMResident » Tue Feb 13, 2018 11:46 pm

WanderingDoc wrote:
Tue Feb 13, 2018 12:17 am
DVMResident wrote:
Mon Feb 12, 2018 11:40 pm
Assuming 20% down with a 30 year 4.5% fixed on a $800k house, your PI $3,242/mo plus tax $1,416/mo (assuming my googling if NJ taxes in correct) plus insurance, maintenance, utilities, and the opportunity cost of the down payment. Only <$1,000/mo in principle reduction for the first 5 years (at ~92% efficiency). All that ignores the deductions, but they're less with the new tax bill.

Renting is cheaper by a mile.
NJ has dozens of counties and thousands of towns. All have different property taxes. Not sure what you "googled". Although in aggregate, NJ has above average property taxes. Plenty of towns with less than $1,400/mo. in property tax.
"Average NJ Property Tax" :confused Sure, some areas will be less expensive and some will be higher. OP didn't specify town.

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

Re: Buy or Rent under new Tax Law

Post by randomguy » Wed Feb 14, 2018 12:01 am

supersecretname wrote:
Mon Feb 12, 2018 11:17 pm
The best way to get an answer on the internet is to ask a different question.

You can’t afford a 750k house. Textbook house poor. Continue to rent.
Of course they can afford a 750k house with 200k in cash and a 750k income. And no this isn't even house poor. That is buying the 1.2 million dollar house:). It is a bit more expensive now than it was in 2017 though. The question is if they would rather spend that money on housing (I am guessing it is a lot nicer than the place they are renting) or something else (savings, trips,...). Only they can answer that.

As to if renting or buying is cheaper, who knows. That 750k house turning into a 900k, makes delaying buying a really expensive choice. Having it drop to 600k makes buying a really expensive choice. And there are a zillion other factors that will change which one works out best financially.

I would value the personal stuff more than financial. At some level you can wait (i.e. school really isn't an issue for another 4+ years. Same thing about the 2nd kid) and doing so can give you more info (i.e. congrats on the triplets:)) but you are also giving up whatever value the house has for you.

Nate79
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Location: Portland, OR

Re: Buy or Rent under new Tax Law

Post by Nate79 » Wed Feb 14, 2018 12:12 am

randomguy wrote:
Wed Feb 14, 2018 12:01 am
supersecretname wrote:
Mon Feb 12, 2018 11:17 pm
The best way to get an answer on the internet is to ask a different question.

You can’t afford a 750k house. Textbook house poor. Continue to rent.
Of course they can afford a 750k house with 200k in cash and a 750k income. And no this isn't even house poor. That is buying the 1.2 million dollar house:). It is a bit more expensive now than it was in 2017 though. The question is if they would rather spend that money on housing (I am guessing it is a lot nicer than the place they are renting) or something else (savings, trips,...). Only they can answer that.

As to if renting or buying is cheaper, who knows. That 750k house turning into a 900k, makes delaying buying a really expensive choice. Having it drop to 600k makes buying a really expensive choice. And there are a zillion other factors that will change which one works out best financially.

I would value the personal stuff more than financial. At some level you can wait (i.e. school really isn't an issue for another 4+ years. Same thing about the 2nd kid) and doing so can give you more info (i.e. congrats on the triplets:)) but you are also giving up whatever value the house has for you.
Their income is not $750k, it is $250k......

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grabiner
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Re: Buy or Rent under new Tax Law

Post by grabiner » Wed Feb 14, 2018 10:41 pm

Under the new tax law, if you take out a $600K mortgage at 4.5%, your interest will be $27K. With $10K in state and local taxes, and some charitable contributions, you will be be able to deduct more than half the interest. Since you are in the 24% tax bracket, the after-tax mortgage rate would be about 4%. Before the tax law changed, you could deduct all of the interest at 28%, resulting in an after-tax rate of 3.24%.

NJ does not allow a deduction for mortgage interest. It does allow a deduction for property tax, but renters get this deduction as well (18% of your rent is assumed to be property tax), so that is a wash.
Wiki David Grabiner

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Nestegg_User
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Re: Buy or Rent under new Tax Law

Post by Nestegg_User » Wed Feb 14, 2018 11:08 pm

Renting appears significantly cheaper, especially if you can claim property tax deduction as renter (per Grabiner)

the job situation further pushes the decision towards renting

likashing
Posts: 136
Joined: Tue Mar 06, 2007 7:58 pm

Re: Buy or Rent under new Tax Law

Post by likashing » Thu Feb 15, 2018 4:56 pm

grabiner wrote:
Wed Feb 14, 2018 10:41 pm
Under the new tax law, if you take out a $600K mortgage at 4.5%, your interest will be $27K. With $10K in state and local taxes, and some charitable contributions, you will be be able to deduct more than half the interest. Since you are in the 24% tax bracket, the after-tax mortgage rate would be about 4%. Before the tax law changed, you could deduct all of the interest at 28%, resulting in an after-tax rate of 3.24%.

NJ does not allow a deduction for mortgage interest. It does allow a deduction for property tax, but renters get this deduction as well (18% of your rent is assumed to be property tax), so that is a wash.
With your same example of $27k interest, $13k interest will be deductible at likely the 24% bracket for OP's income. The effective interest will become just 3.98% - which is a much smaller discount than before. The amount of effective difference is $370 *per month* vs pre 2018 tax laws.

Not to talk about $27k interest will only be the 1st year of the loan. Interest will go lower as the loan principal goes lower, and the $370 per month difference will increase every year.

Tracyfaa
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Re: Buy or Rent under new Tax Law

Post by Tracyfaa » Thu Feb 15, 2018 6:06 pm

Having been there/done that I have to say that you've set your budget way too high given your down payment, and 9 month old and wanting to have another, (kids are EXPENSIVE!!!) and especially the statement about your job stability. It would also be irresponsible for a lender to approve a loan that high given that info. Have you set up the 529 account yet? You need to have enough for each child.

Ask yourselves how much of your income is stable before taking the plunge. Renting may be cheaper, but you will NEVER recoup a single dime of that money. Rent while you get your finances in order, then decide, based on your expected stable income, how much mortgage you can truly afford. Force yourself to stick with it. Don't let a lender lead you down the proverbial path by over-estimating what you might be able to borrow and pay back. That's what was happening twelve years ago when borrowers got so deep in debt that banks were foreclosing, many homebuyers were declaring bankruptcy or just walking away. When will housing prices drop again? Who knows. A home purchase, (I mean a real HOME) can be stressful, given the fact that you can be upside down for a time if prices fall. So what. If you're planning long term, you shouldn't care. If your'e looking for profit, you're just gambling IMHO.

Don't not buy a house because renting is cheaper. Don't buy a particular house because a cheaper/better purchase option is nearby. You're obviously young enough to be patient. Do some shopping. Exercise due diligence. Especially do not overextend yourselves if you want to have more children.

:beer

JBTX
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Re: Buy or Rent under new Tax Law

Post by JBTX » Thu Feb 15, 2018 6:10 pm

Seems like mortgage plus taxes plus insurance would probably be around $50000 per year. That is just short of 20% of gross income. That is certainly very doable, but I personally wouldn’t want to have 30% plus of my after tax income tied up in fixed house payments.

If you buy then about 70%+ of your personal assets are tied up in your home. Again a little high for my tastes 50-60% starting out seems more manageable.

I totally get that in HCOL you are going to have a lot tied up in your home and if you choose to own that is somewhat unavoidable. I just would not be comfortable with so much of my assets and income tied up in a home.

RRAAYY3
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Re: Buy or Rent under new Tax Law

Post by RRAAYY3 » Thu Feb 15, 2018 6:17 pm

Thank you for reminding me of why I’ll never buy a home in NJ

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