The Home Ownership Thread

[ellsbebc]

I view rent vs. buy as a lifestyle choice. A home purchase should not be considered an investment.

There are many calculators available online to determine which option is best financially. I prefer this NY Times version, because it accounts for most variables. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=2

 

[Master-Classter]

I think you guys hit the overall main points which are that houses aren't really 'investments' and depending on your lifestyle/plans one option may work better. They might make money, but in all likelihood between the cost to buy/sell and maintenance cost+effort and risk of lack of diversity, more or less assume you'll break even and probably could have made a bit more by investing the money in a market, but if you're getting married and having kids and don't plan to move for at least 10-15 years then it's probably an ok thing to do.

I also made a note not included in the above pro/con about the cost of renting versus house prices discrepancy. For example here in Toronto, mortgage rates are pretty low so we have people taking on huge loans and driving up house prices and they'll be in for a shock in 5 years when rates renew. Plus our rents tend to not increase that much per year. So as of now, renting makes more sense. However (I'm 30) in about 5-7 years if the prices come down pretty hard/fast I'd consider buying in with a willingness to sell 10-15 years later.

I just figured you guys might be interested to see all the pros/cons I could come up with based on reading around and was also curious to hear your thoughts and see if I missed anything important too.

Spoiler: Here's my list of various calculators:

http://www.getsmarteraboutmoney.ca/...ator/buy-or-rent-calculator.aspx#.VvIdpDH2Qrc
http://www.money-zine.com/calculators/mortgage-calculators/rent-vs-buy-a-home-calculator/
http://www.free-online-calculator-use.com/house-affordability-calculator.html
http://michaelbluejay.com/house/rentvsbuy.html
http://househuntvictoria.ca/resources-2/ (wait or buy spreadsheet)
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?abt=0002&abg=1&_r=0
http://www.vertex42.com/ExcelTemplates/home-expense-calculator.html
https://www.tdcanadatrust.com/planning/life-events/buy-a-home/homeownership-cost/
http://www.fiscalagents.com/toolbox/worksheets/mtgplanner.shtml

 

[SeaJen]

Part of your assumption appears to be the prime+ aspect of mortgages, but in the US we have fixed rate mortgages, so the payment in yr 1 is the same as in yr 30.
You also build in the assumption that for any given location comparable homes are avaliable to rent or own, which is true in urban areas, but not in the burbs. There is a home that is rented near me (just one though) and it's rent is more than twice my piti...actually closer to 3x, because the rental inventory allows it, I guess.

So all that to say, real estate is always local, so very hard to generalize.

 

[jbarwick]

I look at home ownership as a lifestyle choice and not an investment. You have to live somewhere and it really depends on what you make of it. I do not really count my house as an asset because monetizing it is tough if you need the money.

That NYT rent vs. buy calculator is really useful in the decision making process.

 

[jcman311]

I know around here the housing market has been crazy. I feel (and have no actual proof, just guessing) that prices for both renting and buying have been skyrocketing here because new homes and new rentals stopped building during the recession and now cant be built fast enough to accomodate the demand.

I know with my house that it was crazy devalued (city assessment) about 5 years ago and now all the houses I look at are selling for what seems to be a lot more than before houses were devalued. We are always shopping for a newer home (still in our "starter" home) but we are definitely waiting until this trend subsides.

 

[RedLantern]

Also, your opportunity cost with respect to other investments really depends on how much you put down. For example, my wife and I only put 5% down on our house, then refinanced a year later because the value had increased enough that we could drop our PMI. After we got rid of the PMI, our PITI was the same as what we were paying in rent (in a place that we were renting at probably 4-500 below market). I realize, however, that we've been extremely fortunate in the way those things worked out, and most people could not expect to replicate that.

 

[Master-Classter]



Part of your assumption appears to be the prime+ aspect of mortgages, but in the US we have fixed rate mortgages, so the payment in yr 1 is the same as in yr 30.
You also build in the assumption that for any given location comparable homes are available to rent or own, which is true in urban areas, but not in the burbs. There is a home that is rented near me (just one though) and it's rent is more than twice my piti...actually closer to 3x, because the rental inventory allows it, I guess.

couple of good points there, thanks. Yes, so as far as I know, for places like Toronto, our mortgages reset every 5 years (which actually seems fair game). If you could lock in for 30 years at a low rate that would be pretty great. Also becuase of the current low rates, people are overleveraged... my parents house is a fairly cookie cutter suburban 3/4 bedroom 2 bathroom 3 floors type dealio and should sell for maybe $650-750 but the local comps are selling for more like $900-1.1M so that's a sense of how inflated these are.

Also, good second point, I hadn't thought of that. What I may want to rent may not be rentable. My suspicion is that I'd probably rent for the first 5 years until I'm married and with a young kid up to 3 years old or something, in a downtown/fun kind of area, then buy for 15-20 years and sell ideally if I can catch on the upcycle and the kid's 20-25 and moves out for college and then spend the next 5-10 renting until the market comes back down and buy something smaller. Best laid plans of mice and men right. In reality will probably buy too much house and stay there till I die.

Also, your opportunity cost with respect to other investments really depends on how much you put down. For example, my wife and I only put 5% down on our house, then refinanced a year later because the value had increased enough that we could drop our PMI. After we got rid of the PMI, our PITI was the same as what we were paying in rent (in a place that we were renting at probably 4-500 below market). I realize, however, that we've been extremely fortunate in the way those things worked out, and most people could not expect to replicate that.

Sounds like some good timing on your part. I'm hoping to hold off on buying a few years while I rent and save up enough for a good solid downpayment including some equities growth while I can still do that before the money's locked into a house.

 

[ellsbebc]

In my parts of Tennessee,real estate is very affordable. You can get a 4BR/3BA at 2,500-3,000 sqft for $200-230k. Or you can rent a basic 2BR apartment for $1,200/month. The only thing preventing us from a home purchase is the uncertainty of if we stay in this area and for how long. Real estate transaction costs can eat you alive, but it's not terrible when talking cheap real estate.

One issue I have with the NY Times calculator is it fails to account for a potential Termination Fee if you break your lease while renting.

 

[otc]

Yeah, but the termination fees don't matter if you stay out the lease, or find a subletter/person to re-lease to (laws vary, but where I live, the landlord can't stop you from doing so)...unlike real estate closing costs, the majority of renters never pay a termination fee.

 

[Piobaire]

I don't think homes should be viewed as a short or medium term growth investment but an investment they are. View more as an IRA type investment is my take.

 

[ChrisGold]



I don't think homes should be viewed as a short or medium term growth investment but an investment they are. View more as an IRA type investment is my take.

I agree with this. For some people the forced "saving" becomes their only large asset, as long as they are not pulling money out as they accumulate equity. I think the mistake that many people made (make) is that when rates are falling they are on and off the re-fi merry go round, constantly re-setting their mortgage to 30 years. Most upwardly mobile people are better served by:

1. Buying only the house you can afford at the time without projecting future income
2. When you have an increase in income, re-fi to 15 years instead of another 30
3. Resist the urge to move up to bigger and better... make your house your home and continue to personalize and improve it, as long as you aren't too pressed for space

I switched to a 15, make additional principal payments and now it's timed to be done by the time all my kids are finished with college, or before. (Plus my total interest paid is reduced by over $200K)

 

[Piobaire]

Yeah, I think the whole using your home equity as an ATM is a bad idea. If your debt burden viability is predicated on either increased future earnings or rapidly appreciating real estate prices you're setting yourself (and your family) up for grief. We'll have our house paid for in 10.4 years if we keep up the current schedule and having such a large asset for retirement is very comforting. It's funny how people don't get the financial mechanics/benefits of an auto lease but then seem to view their mortgage as something that will be there until they die and never build up substantial equity in their home.

 

[ChrisGold]

^ Exactly. I'm at virtually the same pace. I don't factor it in my retirement savings, but I assume that its sale will cover the cost of any retirement home/condo I would buy.

 

[ellsbebc]

Yeah, but the termination fees don't matter if you stay out the lease, or find a subletter/person to re-lease to (laws vary, but where I live, the landlord can't stop you from doing so)...unlike real estate closing costs, the majority of renters never pay a termination fee.

Definitely location and lease contract dependent. Think it would be an enhancement, albeit insignificant, to the calculation. I am unable to sublease in my contract and termination fees can be around $2,500. The user could always use $0 in the calculation.

 

[brokencycle]

Fixed a leaking dishwasher yesterday. The root cause was gross: mildew/mold/junk had built up in the steam exterior steam vent of the dishwasher, forcing water to condense in it and leak inside the door.

I think it was @Ataturk who suggested ways to prevent mildew/mold growth in the past: something like occasionally run a cycle with high temp and vinegar or something. Turk, if it was you, what did you recommend?