PHeller wrote: What about the idea that your losing money when you rent? For instance, if I rent for 5 years, I'm spending $84,000, none of which I get back. If I buy during the time, and even if I lose money to interest, closing costs, maintenance, and maybe even a little bit when I sell, does that really equal anywhere near $84,000 in money down the drain?
You've got to factor in the opportunity cost of having money tied up in the down payment rather than being invested.
So lets run the real numbers on a 250K home.
The total payment with P&I and PMI would be about $1285 give or take $50
It looks like taxes are affordable at around $100 a month.
Insurance will be $75-100 a month.
After 5 years, you will owe $225K.
The cost to sell if you sell for exactly what you bought it for is $15K
So provided nothing breaks and you have no major fixes you would clear $10K.
I don't know what the history is in Flagstaff on property values. It's a really tight line. and if you go less than 5 years, you will be upside down.
It's a gamble at 5 years.
here's the amortization on a 30-year 3.75% mortgage... http://www.myamortizationchart.com/30-year/300000-dollars/3_75-percent/
With those numbers, you'd save about $30k over renting. Subtract closing costs, home inspection, taxes, insurance, upkeep and improvements.
I think it will end up at close to a wash, if not favor on the side of renting.
My take on this from a purely financial perspective - if you're only in town for five years and plan to resell afterwards, I don't think the numbers work for you, especially if you go with your wife's idea of what you want to buy (because that'll reduce the effective ownership period to four years).
I know the common reasoning is that you're "throwing money away renting" when you could pay interest on a mortgage instead (because that's most of what you'll be doing in the first few years). I think in your situation, the rent actually buys you freedom - don't like the area anymore in two years? Move away.
Try that with a house you own and the transaction costs may keep you tied down in a place that you don't want to (or can't, say, for job reasons) live in any longer and you find that it'll be prohibitively expensive to move.
Regarding the forced savings plan, there's another way to look at it. That $50k downpayment you need for the $250k house (plus closing costs, realtor fees and all the other bullE36 M3) could probably earn you an average of 3-4% p.a. in a balanced and fairly safe portfolio over the next 5-ish years and you don't have the 2x 3%-6% transaction cost at either end. That puts a bit of a different perspective on the forced savings plan/investment in a house, doesn't it?
If you want to buy a house because you want to own the roof over your head and you stay in a place for a reasonable amount of time, by all means do so because you want to be a homeowner. Just don't make the mistake of confusing it with anything other than a hole in the ground you throw money into.
You need to live somewhere, so buying a house is always a good idea.
You both have the right idea, buy the best deal in the best hood. In real-estate, you really make the profit when you buy, not when you sell.
The lower the mortgage payment the better you sleep and the more fun you have doing other stuff.
Learn about school districts and how well regarded the one for your hood is. It is a big value proposition for buyers.
On paper, it may or may not make sense to buy versus rent, but if there is a value proposition such as a garage that enables a car hobby, or a yard that allows for gardening or entertaining, it could tip the scales.
Since you are only staying five years, as you buy the house, look at if through your eyes five years from now as you try to sell it. If you have a GOOD real estate agent, and they know your plan, they will point you in the right direction.
PHeller wrote: What about the idea that your losing money when you rent? For instance, if I rent for 5 years, I'm spending $84,000, none of which I get back. If I buy during the time, and even if I lose money to interest, closing costs, maintenance, and maybe even a little bit when I sell, does that really equal anywhere near $84,000 in money down the drain?
Housing is never free--that $84,000 is going down the drain whichever option you choose. You can either give it to a landlord, or pay it as mortgage interest +taxes +insurance +maintenance +sales transaction costs.
Does interest, taxes, insurance and maintenance really add up to nearly 50% of owning a home? I doubt it.
In the first 5 years of ownership, mortgage interest, insurance and taxes make up more than 90% of your mortgage payment. You will never see any of that money again.
If you sell at the end of 5 years you'll pay 3-7% of the home's total value in agent fees and closing fees, which undercuts any appreciation in your home's value and payments you've made toward the principal.
PHeller wrote: Does interest, taxes, insurance and maintenance really add up to nearly 50% of owning a home? I doubt it.
For the first 5 years? It is probably very close to 90%.
Here is a chart showing you exactly that. It is showing a 6.5% mortgage rate, which is high, but since you'll probably have PMI it isn't that far off.
PS -- I'm not trying to be a wet blanket, but I've owned three homes and now I rent. There's a lot of things I know now that I wish I had understood back before I made my first purchase.
Who says I'm paying PMI? We won't buy until we're very close to 20% down.
It also seems like paying an extra $100 a month can more quickly build equity. Is that right?
PHeller wrote: Who says I'm paying PMI? We won't buy until we're very close to 20% down. It also seems like paying an extra $100 a month can more quickly build equity. Is that right?
Sure, but does that money do better in a house or in VTSMX?
Well considering my Marketwatch game made up of predominantly Vanguard Index Funds is doing horrible right now, I'm not so sure.
PHeller wrote: Well considering my Marketwatch game made up of predominantly Vanguard Index Funds is doing horrible right now, I'm not so sure.
Stock market as a whole has been pretty disappointing for the last year or so. There's certainly no sure thing in the stock market, but using a house as your investment assumes many of the same risks. Values of stocks and homes both depend on market factors out of your control. The housing market in most places is pretty robust right now, and home values are high, so you'd probably be "buying high" in stock terms. There's no telling what conditions will be like in 5 years when you think you'd be selling either, so you may not be able to sell it for what you've got into it, unless you find a really nice deal. If you want it to be a money maker, it will probably have to be a fixer upper bought well below market value where you do most of the work, or get it done at a deep discount.
PHeller wrote: Does interest, taxes, insurance and maintenance really add up to nearly 50% of owning a home? I doubt it.
If you look at that payment schedule linked to above you pay $200k in interest and $300k in principle over 30 years at 3.75%. I would be shocked if a homeowner didn't pay another $100k in upkeep and taxes over the life of the property. Long term this work out because the property goes up in value over the 30 years and you get your principle back out. I would say it's a certainly that half or more of the money you spend on your house over 30 years is just as 'wasted' as rent.
Look, when I was looking into buying a house with a 5 year horizon and $900 rent to compare it to, I came out as the house had to be less than $80,000 to buy it. I almost did buy a $50,000 house. The only reason I came close to pulling the trigger was that it was walking distance to a university, so if it all hit the fan I could rent it out.
A 5 year horizon isn't that great. From a financial point of view, it almost certainly does not make sense. There are lot of other reasons to buy a house--the houses available for purchase are much nicer than what is available for rent, for instance--but you won't win the finance argument on 5 years. The numbers are not going to work out, and it is foolish to try to convince yourself that they will.
If you really want to buy a house, do it because it is a better living option than renting--your quality of life will go up. Do it to lock in your rental rate. Do it because the mortgage will improve your credit score and financial leverage. Do it because you think it may become an income property when you move and you've always dreamed of being a landlord.
Don't do it because it is a smart financial decision compared to renting. It just isn't.
PHeller wrote: Well considering my Marketwatch game made up of predominantly Vanguard Index Funds is doing horrible right now, I'm not so sure.
But you're comparing short term volatility to parking money in real estate for the medium term. Both have volatility, but you need to factor in the time horizon. You also have to factor in that with stock-type investments at the likes of Vanguard, you don't start out 6-7% in the hole that you have to make up before you break even.
I can fully get behind your wife and you buying a house because you want a house of your own as a place to live rather than rent. It's the forced savings plan/investment part that I object to.
When we bought our house about three years ago, we bought it with a long time horizon and the idea that if we had to move, we'd probably just turn it into a rental for a while. Six weeks after we bought it, my supposed stable (now ex-) employer announced they'd just sold the company. If I had known about that we'd never bought the house because we essentially boxed ourselves in by buying the house. Given how few jobs there are out here for people like me, this cost us the freedom of upping sticks and moving to a place where it would be easier for me to find work and potentially possible for my wife to find work at all.
We're open to the idea of renting our place too. Our local college is continuously growing, with 3 off-campus student housing projects to meet demand. Projected rent for those places will be $900 per room in a 2-4 bedroom apartment, $1400 studio.
PHeller wrote: Well considering my Marketwatch game made up of predominantly Vanguard Index Funds is doing horrible right now, I'm not so sure.
I think real estste as risk diversification is a good idea actually, but the hold time is really long compared to equities and bonds. I have 250 acres that I pay about 1% a year on in taxes, so equal to a 1% load mutual fund. I don't expect it to do as well as a mutual fund from a growth perspective, but what I get in return is a place to hunt and go camping with my kids.
You'll need to log in to post.
