Rent vs Buy
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Anonymous
| DH and I are locked in a debate about whether to continue renting and putting the equivalent of a down payment into the stock market and growing it their vs. ploughing it into the housing market and having it tied up. He likes to rent for the flexibility and feels that maintenance, repairs upgrades, interest and taxes actually make renting not as wasteful as it would seem at the outset. Neither of us a hung up on needing to customize our living space. Something comfortable in a family friendly neighborhood. So should we rent or buy? |
Anonymous
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You need to first ask yourself why you think the stock market is safer bet than the DC housing market. The stock market is NOT the place to gamble your down payment money with, unless you plan to put it into a very low risk investment. The real estate market in the DC area almost never suffers the same type of downturn that the rest of the country does. yes, it can and has gone down but not to the degree of the rest of the country.
I have been on both sides of the street so to speak, home owner AND renter. We are renting right now because we honestly don't know how long we plan to stay in DC. We love renting, its no fuss-no muss. But we also miss home ownership as there is a certain pride you take in your home when you are an owner. Not that we don't care about our rental home, we do - we just don't spend our weekends in home depot like we used to looking for the perfect paint color etc. If you have school aged kids, then you obviously need to keep that in consideration - whether renting or buying. If you can afford to buy in a sought after school district and plan to stay in DC for at least 6 years, then buying would be financially a better option - but don't poor your money into a fixer either unless its INSIDE the beltway. |
Anonymous
Historically, the stock market has outperformed the housing market by quite a bit. Adjusting for inflation, the average historical rate of appreciation of a house is estimated to be less than 1% per year, versus the stock market is 8% per year. The DC real estate market outperforms other markets, but you can't assume that the rapid appreciation seen in the mid 2000s will continue on. I don't think that putting your money in a low fee index fund is that risky, especially if you hold on to it for multiple years. Statistically, you are more likely to make money on a diversified investment in the stock market than on a house. http://www.dailyfinance.com/2012/05/29/6-simple-reasons-why-you-shouldnt-buy-a-home "Home prices always go up in value, right? After the recent real estate bubble burst, we all now know this isn't true. But what you may not know is this was true even before home prices began falling. Homes appreciated at an inflation-adjusted 0.4% annually from 1890 to 2004, according to Robert Shiller in his book Irrational Exuberance. Consider this: A $100,000 home is historically worth only $112,723 after a 30-year mortgage is finally paid off. Whereas $100,000 invested in large-cap stocks -- assuming that market segment's historical rate of return -- would be worth $719,677 if they earned their long-term average return, even after adjusting for inflation." Of course, you might always buy a house in a neighborhood that shoots up in value as the area becomes more desirable, but that is just as much gambling as speculating on stocks. |
Anonymous
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I don't think renting is completely wasteful. You are generally not stuck with any maintenance, and often utilities are covered. There are often amenities you wouldn't have in a house you own. You're just not getting the appreciation if prices in your area go up. And rent increases would definitely be a factor, since a fixed mortgage payment would not go up. In this area, the cost of renting vs. buying is not always that clear-cut.
In my case, the mortgage on my house is $2,400 because I have equity. In my area, that wouldn't get me a 2BR apartment in a decent building. But for people who don't have a big down payment, renting might be cheaper than buying if they're happy with their rental options. When you have kids, you do need to do the math on whether you can afford a house in a school district you like, and if not, if you can find rental options that'll be ok for you long-term. (it would suck to have to pull your kids out of school because you had to move out of boundary to a new rental 3 blocks away, or something.) |
Anonymous
| Two things are missing from this discussion-- MID and the fact that although you may only make a little money on a house you buy (100,00 to 112,000 in the PP example) you have lived "for free" for 25 years in this scenario. Renting for 25 years at $2000 would be $600,000. The mortgage payment is being invested in the house and you end up with something in the end. Also the mortgage interest deduction lowers your taxable income. |
Anonymous
The flipside of this is that most people will buy a nicer house than they would rent. While you can't quantify it there's an intangible value to living in a nicer place. |
Anonymous
You don't live for free when buying. You have to compare what you spent on interest (after the tax break) against rent. I agree that people tend to buy a nicer place than they would rent. Its possible you end up spending nearly equal amounts in the end but have nicer lodgings from buying. |
Anonymous
Owners also get the benefit of increased equity. In the case of Capitol Hill, many people have tripled or quadrupled their equity in a decade. |
Anonymous
Isn't that basically saying home values will continue going up? |
Anonymous
Right, but I think buying in Capitol Hill in the early 2000s is akin to buying Apple stock right when they were about to go bankrupt in the mid '90s. Right investment, right time. You can't generalize about the housing market based on that rapid growth in a neighborhood that rapidly gentrified being in the right place at the right time. I doubt housing prices will continue to go up the way they have in the last decade in the DC area. |
Anonymous
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Home ownership makes sense as a diversification of your portfolio, not as *THE* portfolio. The 6% you will see in stocks over time will far outweigh the value you will see in homes over the long term.
In our case we 1) Identified how much we could reasonably afford, while 2) minimizing the down payment we put in and 3) maximizing our mortgage. Please note this doesnt mean getting the biggest mortgage you can. It means if you want to buy a house for $500K and you can pick between paying cash or putting down $500K and mortgaging $400K, the smart money is on mortgaging $400K. The reason for that most often cited is the tax benefit of mortgages, which is not the right answer. The reason thats the smart move is that the $400K you DIDNT tie up into the house is very likely going to return 6% or more per year while the mortgage is costing you 3 or 4% - the tax benefits are merely a perk. Plus if the $400K you had is (or could be) put into a tax advantaged account you now have even MORE going for you. Theres also the liquidity argument, but I think most people miss the real value here. Lets say for the sake of argument, that you make $100K a year and most years you struggle to max out your retirement. Lets say that under option A) you take your $200K and you buy a house. Option B) you DONT take your $200K and buy a house, but you DO invest it. Now fast forward a year and lets say the market has gone up by 10% - on the home and in stocks. In either case your 200K has increased in value, but in option B you can now take the $20K you have gained, realize the gains, and use it to top off your 401k. In option A, you cannot. What option B has allowed you to do is two things: 1. Take some of the earnings off the table, 2. Move those to a tax advantaged status. Obviously that means less if you already max out both your 401ks, but if not... So for that reason, I say rent until you have enough for both a down payment AND other money in the bank. Then buy something modest (see "are we stuck for now" for a how-to-not-to-do-it) and invest. |
Anonymous
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I question whether we did the right thing buying our current home (not in DC area). We put $120K down on a $535K house and pay $2800 per month on a 30-year mortgage. Houses in the neighborhood rent for about the same - $2800. When we go to sell, we will pay at least $25K in Realtor fees, so unless the value on the house goes up a lot (which I don't think it will) or if we stay here a long enough time to build up equity (I don't think we are), I think we would have been better off investing the $120K and renting.
Now the DC area market is much stronger than where I am. We bought there many years ago and made out quite well when we sold. So basically the two big factors are - how long you will stay in the house to build up equity. And whether you think housing prices will continue to increase. |
Anonymous
Don't forget the property taxes, insurance, taxes on the appreciation when you sell, title transfer costs, etc 
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Anonymous
This may be true in your case but I doubt it is generally true given that LL will be paying those same costs along with maintenance costs and LL probably wants to make some amount of profit. I do agree that people generally buy a nicer place than they would otherwise rent so it's true in that respect but it's not apples to apples. |
Anonymous
On a related note, increasing your equity doesn't do you much good until you actually sell the home or you leverage the equity to do something with it. Price can go down thouh. |