Sunday, August 24, 2008

Really Thinking About Real Estate

"If you rent, you're throwing away your money." That has become a regular assumption when it comes to deciding on whether to rent or buy a home. If that's true, then why does this writer for SmartMoney.com say he will never buy a home? Here are some reasons why I don't think this issue is so clear cut:

1) Buying a house is usually more expensive than you think:

2) More of your money is tied up in this single investment: By investing your money evenly in a variety of things, you can spread out your risk. Don't put all your eggs in one basket.
3) There is of course other ways, usually better ways, to invest your money:

4) Real estate is an investment you live in: This complicates things when you need to move across town, relocated for a job, or sadly because of divorce. It also makes the roof over your head another risk filled investment.
5) Housing prices do not always go up: Here is a video showing what the change in house prices would look like if you could ride them (the end has the data in a simple graph).

To give a real world example, I used this NY Times calculator to see if it would be better to rent or buy this this Philadelphia condo. Using the average mortgage rate and putting 10% ($16,500) down, it is better to rent unless you live there for at least 7 years.

At the end of the day, it's not whether you're throwing money away or not. It's comparing the return you will get on all the money you invest. A home should be a nest, not a nest egg.

5 comments:

  1. This post I have a problem with because you are national average figures (including ridiculous housing markets like San Fran., Los Angeles, New York, etc) instead of taking regional or statewide average figures which is a main reason you are living where are you now and why people continue to flock toward the southeast region in general. Look at the differences in numbers when you run them at an area where you should be running them (where you live)... These numbers are no where close to the numbers you have posted.

    For example:
    Exact numbers from my first house (a good 2 Bed, 2 Bath starter house for a young family)

    Purchase Price: $115,000
    Down Payment: $5,000
    Interest Rate: 5.1%
    Taxes & Insurance: $2500
    Avg. Monthly Main.: $100
    Major Repairs & Improvements: $1000
    Monthly Mortgage: $760.00
    -------------------------------------------------
    Avg. Monthly Rent in Greenville, SC: $750.00

    I will buy and sell this house less than 4 years later and make approx. 18,000 profit.

    If I had rented I would have made 0 profit.

    In conclusion, if you are lucky enough to be living in a low-cost real estate environment, which you are... renting is simply not a financially sound decision no matter how long you want to stay in a house after you buy.

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  2. Wow, you've really done you're homework on this. Austin makes a pretty dang good case, though.

    I heard a guy on the radio say that it wasn't worth buying if you plan to move in 6 years or less. Never knew if that was actually true. I guess I still don't.

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  3. Something to consider is that if it is radically cheaper to buy in the Carolina's, then it is probably equally cheaper to rent here as well.

    At first glance it looks as if that $18,000 of profit you claim is not counting your maintenance, taxes and insurance, and opportunity cost of down payment over the last 5 years?

    Down Payment: $5,000 x 8% return=$1,700
    Taxes & Insurance: $2500 x 5 years=$12,500
    Avg. Monthly Main.: $100 x 60 months=$6,000
    Major Repairs & Improvements: $1000
    Total: $21,200

    My point was not that it's dumb to buy or dumb to rent. But that it all depends on your income, interest rate, and how long you plan on living there.

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  4. Yea I can see your point only if you are spending the same amount on rent as you are on mortgage and only if you disciplined enough to be putting your down payment money into a place where you can get 8% rate. So the difference is negligible (2500 dollars give or take) but the whole time person A has been living in a house while person B has been renting an apartment.

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  5. Some people would actually rather rent. Like, uh, me for instance.

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You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.