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Buying a place vs renting... argh.

F

flot

Diamond Member
So, I figured I'd ask here for wisdom on buying vs renting.

I've been looking around, and trying to do the math, and am having a tough time supporting the "buying" case. Unfortunately, I get LOTS of opinions from people (most of which are "are you crazy? Buy a house!") but the more I look into it financially, the less clear the decision becomes.

Here's the lowdown: Right now I rent what I consider to be a decent apt in a great neighborhood, for $950/month. Similar condos in the area sell for anywhere from $130,000-190,000. I'd happily continue renting here, but that's not an option - my lease is going to end and I am going to be force to move. (And my apartment will become a condo and will sell for about $160,000)

The irony really hit home when the building announced its conversion to condos - they put all the #s down on paper, and with my unit selling for around $160,000 - my monthly payment would be somewhere in the $1600 range. So instead of RENTING my place for $950, they want me to BUY it for $1600.

Obviously, I said "F that" and started looking elsewhere. But here's the irony - lets say I want to spend about $160,000 on a place. And yes, it seems that my monthly payments really will be $1500-1600 a month with that kind of mortgage. So it's costing me $600 a month more to buy instead of rent. But even IF I could sell the place in 3 years for $190,000 -- my net profit would only be slightly more than if I had JUST KEPT RENTING AND SAVED THE EXTRA $600 every month. After all, $600 a month for 3 years is $21,000 - and that is literally risk-free. The condo on the other hand, could take months to sell (-$1500 profit for each month), would probably have significant maintenance expenses, and will cost me at least $8,000 up front.

So what is the motivation to buy again???
 
Why would you buy an apartment? Buy a house. You can plant your own plants, paint it whatever color you want, tear down walls and add rooms, put up a basketball hoop in the driveway, etc...
 
There are tax writeoffs for mortgage interest. Also, your rent can be increased by any amount the landlord wishes every year. Just because your rent is $900 today doesn't mean that it couldn't be $1300 in a couple of years.

Buying vs. renting is a mixed bag. If you are planning on moving around you are probably better off renting. If you are going to stay in the same place for the next 10 to 20 years then you should buy.
 
Originally posted by: notfred
Why would you buy an apartment? Buy a house. You can plant your own plants, paint it whatever color you want, tear down walls and add rooms, put up a basketball hoop in the driveway, etc...
Click to expand...
Also a heck of a lot more upkeep involved.

If you're going to stay in your area for the long-term buy a house/townhouse/condo as soon as you're financially able to do it. The sooner you stop paying other people to stay in their place the better off you are.

 
Well, in your situation you may be better off to rent and save the extra money for a while. Then you can make a large down payment that will take your monthly house payments lower. Most areas have a different dynamic than what you are describing. We pay ~$800/month for our house (4br, 2.5 bath). To rent a house of similar size would be close to $2000/month, and would be extremely difficult to find. To rent an apartment here, for a 3br/2ba in a comparable area you will pay over $1000/month. So for most people here buying is absolutely the way to go.

Panda
 
$160k for a condo is a rip. I guess living in a resort area has its price. As you pointed out, you would be hard-pressed to live in and profit from such and investment when you have no existing equity.

In my area, condos go for just under $100k. In those circumstances, you can see that you would likely pay the same or less than what you're paying now, but barring a drop in the area market and provided you keep the place up, if you stayed for 5 years, you would likely be able to resell it for a profit.

Buying is generally better than renting, but if you are a first-time homeowner, you've got some limits to how high you can go.
You should look into first-time home-buyers' programs that let you take advantage of tax breaks.
You should also haggle with your landlord or the future owner. How long have you been living there? How long have you already been lining their pockets? See if they would cut you a better deal as a person with a history of being a member in good standing of the community and someone who would be a help and an asset to the new association. If the condo is worth $160k but you've given them $11k/year for the past how many years, perhaps they would be willing to whack the price down a little bit.

Otherwise, there's not a whole lot you can do for something so pricey.
 
Wait, let me get this straight ... If you save $600 a month you'd pocket $21,000 after 3 years right? But where did the other $34,200 you wasted in rent go? It went into some other guy's pocket. If you buy the house, and sell it at a profit, you just got some of your mortgage payment back as well as some profit. So while you're renting, you're saving a firm $600, but if you buy and then sell at a profit, you're getting back all of the money you put into the house (minus interest) and then some.

Perhaps you already considered this and I'm misunderstanding how you're calculating this ... but what I've found is that you basically are living rent free in the house, putting the money into something that will sell for at least what you paid for it ... if not more.

Homes in my area that were selling for $200,000 in May of 2002 are now being listed at $250,000 ... The housing market may not be as good where you are, but that is a pretty nice profit (if they can sell at $250,000) for only 6 months.
 
Some random responses to people...

notfred: I agree, I'd much rather buy a house - however, an actual HOUSE in the areas I'd like to live will set me back at least $250,000. A house close to those areas, but still somewhere I'd feel comfortable leaving my car in the driveway for a few days unattended would be at least $200,000. I would really really like to get a "fixer upper" in an "up and coming" neighborhood in the $150,000 range - but honestly there are fewer fixers and a lot more "well maybe it won't be quite this ghetto in 5 years" kinds of places.

HappyPuppy: You'd be surprised. Everyone keeps saying blah blah tax breaks blah blah when I act like I'm not sure about renting. BUT again 2/3rds of these people never did the math. With a $160,000 mortage my tax deduction would be somewhere around $8500 a year -- compared to my default personal deduction of what $5500 a year? So basically there's a $3000 * 30% = $1000 tax advantage. Not as big a deal as most people assume.

Panda: That strikes me as a bizarre! Around here, location is everything, and if you've got the location - prices are high no matter if you're renting or buying!

Jzero: good analysis - I could have gotten a 3% discount on the "new" condo. But it just wasn't worth it to me. The problem is that there are two buildings, and once they finish the first building, it's still probably another 2 years before they sell all the units in the 2nd building. So there's no real chance of significant appreciation on the units for at least 3-5 years.

LiQice: Yes the $34000 in rent was "wasted". However, a LOT of that $1600 a month I'd pay for the condo was also wasted. $200-250 a month of that would go to property tax. Another $200 of it will go to condo fees (Which include insurance). Yet another $100 of that is mortgage insurance, and last but not least - for the first 5-9 years of the loan - THE MAJORITY of your montly payment is paying off interest. So the actual equity I'd build in a $160,000 condo over 3 years would be something almost insignificant - I want to say it'd be around $10,000. You are correct on the surface, but I got quite a shock after I did the math. Basically people have been telling me left and right that I can "easily afford" a $160-200,000 place, but after comparing the costs (And benefits) of ownership to those of renting - it looks like my house budget should be a lot closer to $120,000 to compare favorably with my rent costs.

The one rent vs buy cliche I agree with is - the longer you own something, the better off you are. But I'm beginning to think that much more important is just being in the right place at the right time. I'm only 26, not by any means looking for a place I'll be in for more than 3-5 years at the outside. I would definitely consider buying something, living in it for a year or three, and then renting it out - but unfortunately in this particular case (the 165,000 condo) that was against the association rules.
 
One major point. How long are you going to live there? If you're going to live there over 5 years, build equity. Otherwise, you may lose money in the long run over the interest and banking fees for the loan.

If you save up that money that you'd be throwing into your loan, you might be sitting pretty in 5 years and ready to buy then.
 
Originally posted by: flot

Here's the lowdown: Right now I rent what I consider to be a decent apt in a great neighborhood, for $950/month. Similar condos in the area sell for anywhere from $130,000-190,000. I'd happily continue renting here, but that's not an option - my lease is going to end and I am going to be force to move. (And my apartment will become a condo and will sell for about $160,000)

The irony really hit home when the building announced its conversion to condos - they put all the #s down on paper, and with my unit selling for around $160,000 - my monthly payment would be somewhere in the $1600 range. So instead of RENTING my place for $950, they want me to BUY it for $1600.
Click to expand...

With what sort of financing? Even at 7% on a 15-year fixed rate mortgage, your monthly payment is only $1438. So either they're charging some exorbitant rate (7% is at least a percentage point over the best rates available right now), giving you a ridiculously short loan term (like 5 or 10 years), or they're tacking on some sort of fees. If that monthly breakdown doesn't include something like PMI (insurance if you're paying less than 20% down) or condo association fees, someone is trying to pull a fast one.

As for fixer-uppers, my advice is don't, unless you have an enormous amount of expertise and time. Without both, your expenses will quickly make up for any savings on the purchase price of the home, and you'll be inconvenienced with having to live in a half-finished space for the duration of whatever renovations are necessary.
 
You need to factor in the tax savings from deducting your mortgage interest. I don't know if that will make a difference in your decision, but it's probably too big of a factor to just ignore.
 
another option is to buy a cheaper house or a house in a cheaper area.

Stay there for a few years, build some equity, then sell - hopefully at a profit.

Then you will have more cash to put down on your more expensive house, making the mortgage payments less.
 
do your math again!!!!!!!!!!!!!!!!!!!!!!!

I am unclear if the 160 is the mortgage amount or purchase price so we will do both scenarios

Scenario one
purchase price = 160,000
20% down = 32,000
total mortgage = 128,000
mortgage payment = $650 a month

Scenarios two
purchase price = 200,000
20% down = 40,000
total mortgage = 160,000
mortgage payment = 810

Now you need to add condo fee + taxes + insurance which I estimate would be 400 a month.
So, you are looking at between 1,050 - 1,200 a month depending on how much you finance (128,000 vs. 160,000)

The mortgage I chose was a 5/1 ARM which www.bankrate.com quoted me 4.5% in the fort lauderdale, FL area.
That means that the first 5 years your mortgage will be 4.5%, then will adjust annually... I figure that in 5 years you probably would want to upgrade anyways 🙂

if you want to check my numbers, here is an online calculator

http://ray.met.fsu.edu/cgi-bin/amortize
 
Originally posted by: Mister T

Scenario one
purchase price = 160,000
20% down = 32,000
total mortgage = 128,000
mortgage payment = $650 a month

Scenarios two
purchase price = 200,000
20% down = 40,000
total mortgage = 160,000
mortgage payment = 810

The mortgage I chose was a 5/1 ARM which www.bankrate.com quoted me 4.5% in the fort lauderdale, FL area.
That means that the first 5 years your mortgage will be 4.5%, then will adjust annually... I figure that in 5 years you probably would want to upgrade anyways 🙂
Click to expand...

The 20% down doesn't sound like a reasonable assumption from the tone of the original poster's remarks.

Also, I don't think there's any reason for anyone to get an ARM right now. Mortgage rates are currently at 30-year lows, and that suggests to me that the rates will be only likely to increase. Granted, the likelihood of moving within 5 years is high, but if someone's sensitive to monthly payment, why deal with the uncertainty of rising payments over that time period?
 
Originally posted by: flot
So, I figured I'd ask here for wisdom on buying vs renting.

I've been looking around, and trying to do the math, and am having a tough time supporting the "buying" case. Unfortunately, I get LOTS of opinions from people (most of which are "are you crazy? Buy a house!") but the more I look into it financially, the less clear the decision becomes.

Here's the lowdown: Right now I rent what I consider to be a decent apt in a great neighborhood, for $950/month. Similar condos in the area sell for anywhere from $130,000-190,000. I'd happily continue renting here, but that's not an option - my lease is going to end and I am going to be force to move. (And my apartment will become a condo and will sell for about $160,000)

The irony really hit home when the building announced its conversion to condos - they put all the #s down on paper, and with my unit selling for around $160,000 - my monthly payment would be somewhere in the $1600 range. So instead of RENTING my place for $950, they want me to BUY it for $1600.

Obviously, I said "F that" and started looking elsewhere. But here's the irony - lets say I want to spend about $160,000 on a place. And yes, it seems that my monthly payments really will be $1500-1600 a month with that kind of mortgage. So it's costing me $600 a month more to buy instead of rent. But even IF I could sell the place in 3 years for $190,000 -- my net profit would only be slightly more than if I had JUST KEPT RENTING AND SAVED THE EXTRA $600 every month. After all, $600 a month for 3 years is $21,000 - and that is literally risk-free. The condo on the other hand, could take months to sell (-$1500 profit for each month), would probably have significant maintenance expenses, and will cost me at least $8,000 up front.

So what is the motivation to buy again???
Click to expand...

your credit history and buying power increases like a mother after you own your own home.
 
Originally posted by: FeathersMcGraw
Originally posted by: Mister T

Scenario one
purchase price = 160,000
20% down = 32,000
total mortgage = 128,000
mortgage payment = $650 a month

Scenarios two
purchase price = 200,000
20% down = 40,000
total mortgage = 160,000
mortgage payment = 810

The mortgage I chose was a 5/1 ARM which www.bankrate.com quoted me 4.5% in the fort lauderdale, FL area.
That means that the first 5 years your mortgage will be 4.5%, then will adjust annually... I figure that in 5 years you probably would want to upgrade anyways 🙂
Click to expand...

The 20% down doesn't sound like a reasonable assumption from the tone of the original poster's remarks.

Also, I don't think there's any reason for anyone to get an ARM right now. Mortgage rates are currently at 30-year lows, and that suggests to me that the rates will be only likely to increase. Granted, the likelihood of moving within 5 years is high, but if someone's sensitive to monthly payment, why deal with the uncertainty of rising payments over that time period?
Click to expand...

Ok. fixed 30-yr at 5.5%...... 650 / 810 -------------> 730 / 910
As far as the down payment goes, original poster needs to clarify............
20% would be ideal, but if his credit is real good he could get away with an 80/10/10 or even an 80/15/5
still doesnt change the 160,000 mortgaged amount... just increases the cost of borrowing on the 2nd mortgage by a 1% or so.......

I would still go with an ARM though because I am only 23 and it would be my first house 🙂
If I was buying my dream house I would go with a 30-yr fixed...
If it was an income property I would get a 15-yr fixed... but I digress
 
Originally posted by: bleeb
Originally posted by: flot
So, I figured I'd ask here for wisdom on buying vs renting.

I've been looking around, and trying to do the math, and am having a tough time supporting the "buying" case. Unfortunately, I get LOTS of opinions from people (most of which are "are you crazy? Buy a house!") but the more I look into it financially, the less clear the decision becomes.

Here's the lowdown: Right now I rent what I consider to be a decent apt in a great neighborhood, for $950/month. Similar condos in the area sell for anywhere from $130,000-190,000. I'd happily continue renting here, but that's not an option - my lease is going to end and I am going to be force to move. (And my apartment will become a condo and will sell for about $160,000)

The irony really hit home when the building announced its conversion to condos - they put all the #s down on paper, and with my unit selling for around $160,000 - my monthly payment would be somewhere in the $1600 range. So instead of RENTING my place for $950, they want me to BUY it for $1600.

Obviously, I said "F that" and started looking elsewhere. But here's the irony - lets say I want to spend about $160,000 on a place. And yes, it seems that my monthly payments really will be $1500-1600 a month with that kind of mortgage. So it's costing me $600 a month more to buy instead of rent. But even IF I could sell the place in 3 years for $190,000 -- my net profit would only be slightly more than if I had JUST KEPT RENTING AND SAVED THE EXTRA $600 every month. After all, $600 a month for 3 years is $21,000 - and that is literally risk-free. The condo on the other hand, could take months to sell (-$1500 profit for each month), would probably have significant maintenance expenses, and will cost me at least $8,000 up front.

So what is the motivation to buy again???
Click to expand...

your credit history and buying power increases like a mother after you own your own home.
Click to expand...

Yeah, it's insane the amount of money people will give you after you've built up a little equity in the home. We'll have our student loans paid off after five years instead of fifteen now that we've bought our home. Pluse we're building equity on top of that. It's pretty hard to beat if you're planning on staying in one area for a number of years.

 
Originally posted by: Murpheeee
Also remember, if you put less than 20% down you will have to pay Mortgage Insurance 🙁
Click to expand...

not always true... my boss just got an 80/10/10
and my friend managed to swing an 80/15/5 from the bank...

credit history man.. thats what its all about

 
$1600.00 for a $160,000 mortgage seems way off. We have a mortgage for roughly $197,000 at 6% and our total mortgage payment per month is $1608.00 and that includes principle, interest, and escrow for taxes and insurance.
 
Originally posted by: Mister T
Originally posted by: Murpheeee
Also remember, if you put less than 20% down you will have to pay Mortgage Insurance 🙁
Click to expand...

not always true... my boss just got an 80/10/10
and my friend managed to swing an 80/15/5 from the bank...
Click to expand...

The interest charged on the extra 10% you finance to avoid PMI will exceed what you would pay on the PMI payments unless you shorten the term of the additional financing or accelerate payments on the principal of the second loan. I'm not sure the interest on either is deductible.
 
Hey guys -

Here is a _rough_ breakdown of where my $1600 figure comes from. Sorry I wasn't more clear on this in the beginning - but I think it's a pretty reasonable estimate.

$900 = $160,000 mortgage @ 5.5%
$200 = monthly condo fees (insurance, trash, maintenance, possibly water)
$100 = mortgage insurance (pretty much required unless you put 20% down)
$200 = property tax (about $2220 a year actually)
$200 = generic # I threw in for "improvements and repairs" - for instance, the place immediately needed new carpet and paint, which would set me back about a year worth at this estimate, plus the condo association implied that their average improvement assessment is somewhere between $500-1000 a year.

So right there = $1600 a month is the total cost of ownership vs $950 a month for what I'm renting now - which does not need the carpet replaced, has its own insurance, trash, maintenance, the building owners pay the property tax, and of course there's no mortgage or related insurnace because I don't own it. This also doesn't count the $3000-4000 which is lost money just for the closing costs to BUY it and then another $3000-4000 for the closing costs to SELL it. (although if you don't like my generic improvement number above, you can stick these costs in instead)

Actulaly working out the $$s was pretty depressing. Basically I think I figured the place would have to appreciate at least $10,000 a year (7%) for me to break even - and even then I'd have to stay in it for at LEAST 2 or 3 years, and I'd have to sell it immediately - because every month it sits empty would lose me $1500.

I'd like to keep my down payment as LOW as possible, 5% would make me happy but I could potentially swing 10%. Again, that's $$$ that I don't have to cough up when renting, which could be appreciating in other investments.


 
What you have not factored into the ownership equation is the tax advantages of owning. I had the same thoughts the first time we bought a townhouse. From my perspective all I could see was that I was going from an obligation of $650.00 per month to $1000.00 per month and I never felt like I had an extra $350.00 sitting around each month. Even raising my deductions to reduce the amount withheld from my paycheck I still ended up with a tax refund that first year and my only regret was that we had bought a townhouse instead of a single family since we could have handled it at that point.
 
Originally posted by: Linflas
What you have not factored into the ownership equation is the tax advantages of owning.
Click to expand...

Particularly if the property appreciates at a rate better than inflation. I forget what the cap is, but for the price ranges that are being discussed right now, all of that appreciation goes into your pocket if you move into a laterally priced/better home.
 
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