Should I buy or rent a place?

[j]

My roommate joined the National Guard, and I hate my place, so I am moving out. The question now is to rent or to buy. Doing some computations, the only places I'd like to buy around here are around the $250K+ range. Ideally, it would be a 2bdr condo where I could rent one of the rooms to recoup some of the mortgage. I think I could afford the payment (still haven't gotten prequalified for a loan, I am going to do that this week regardless).

Here's the thing: after condo dues (~$150-200+ depending), interest on the loan (half or more of the monthly payment) and taxes and homeowner's insurance (another... $100 or something a month) I have a feeling I'm throwing away enough per month that I could instead throw it away by renting a place and not really be losing out - especially if I budget out the money "saved" by this (not spent on mortgage) and put it into some investment to make a huge down payment on a place later, or for whatever purpose.

Another thing to consider, though, is the way the market, especially certain markets around here are going to boom in the next ~5 years. We have a light rail project that is going to connect one area of North Seattle (Ballard) through the city and down to the airport area, and with oil prices increasing, yada yada, the prices are gonig to shoot up as people move closer to the urban centers.

Where is the break even point here? Is there anything I'm not considering?

BTW, I am seriously considering busting out of this place (Seattle) entirely and taking a long break in some other city or a third- or second-world country to just mess around and do whatever while I am still not tied down to anything. I do somewhat value the freedom to leave, but that's not too much of a consideration as I could arrange to rent my place and e.g. sell my car or whatever to help make the payments on it. In short, I am pretty sure I could keep paying no problem if I decided to bail for a while.

 

[Martinis at 8]

I'd take the move option, but that might depend on your occupation and income.

M8

 

[WatchGuy]

Buy while the interest rates are still relatively low (get a long-term fixed loan)... especially if you are in a booming area. If you decide to take off to a third world country for awhile, you can always rent out your place. One thing you are not taking in to consideration is the huge tax benefit you get of owning your own place as well as the appreciation you will most likely be getting.

 

[Ambulance Chaser]

I am generally in favor of buying over renting. Housing is historically a good investment, because everyone needs a roof over their head. It is the only good I can think of that is both consumption and investment. (I suppose one can also make the case for a Patek, but the more you wear it, the more it loses its value.)

Several questions you want to ask yourself:
(1) What interest rate can I get for a mortgage? Usually a factor of your credit rating, the amount you put as a down payment, and the loan vehicle. I would avoid interest-only loans like the plague.
(2) How long do I plan to stay/own the place? Many adjustable-rate mortgages (ARMs) start off with an attractive rate that will increase dramatically after five or seven years.
(3) Is the housing market overvalued? A good indication is the disparity between rents and mortgages. Also look at the percentage of units purchased by investors instead of end consumers, as the former are the first to dump properties when the market takes a down turn.

If you are thinking of leaving and renting out your place, keep in mind you will likely have to pay for a management service to take care of your landlord responsibilities.

 

[Dakota rube]

By all means buy if you can j, but be very careful about making assumptions of a market getting ready to "boom". I don't think I've ever met anyone who could accurately anticipate such an occurence. If you truly believe a neighborhood is ready to take off, buying into it is probably a good move; make sure, though, that you are investing in a property that will have appeal to someone else, and is not just perfectly suited to your own tastes or requirements.

In addition, be very careful about planning a purchase-then-rent scenario; many, many mortgages specifically call for owner occupancy. If you were to enter into such a mortgage, and found yourself moving with the thought of renting the residence while you are gone, the mortgage company can declare you in default of the agreement and "call the note" or demand immediate and full repayment!

I've seen this happen to a lot more people than one would anticipate, and it creates a real nasty situation: since the property is no longer your residence, you'll not qualify for many mortgage programs, and likely get stuck in an investor product, with higher interest rates, shorter-term amortization and a more significant equity position (higher down payment).

DR

 

[zjpj83]

I think the default rule, unless there are extraordinary circumstances, is always: Buy if you can. Rent is simply flushing money down the toilet. Even if you are paying more by buying than renting the equivalent place (i.e. mortgage, plus maintenance fees, etc.), you are getting equity in return. You are basically paying extra for an option on the market. If I decide to move out of my current place in the city, I'm going to keep it and rent it out, even if it creates some negative cash flow. Paying a little extra money for an option on the market is not a bad deal to make. Renting is an absolute waste of money and is only something to do if you can't afford a down payment, IMO.

 

[countdemoney]

j, you should also check out places like Motley Fool (fool.com) which offers rent/buy calculators.

 

[modsquad]

J,

I don't know the particulars of the Seattle market so what I am about to offer is less specific than what you actually need. Also, keep in mind how much you are paying for this advice. That said, from a broad perspective, I think that now is a bad time to buy real estate and that you should rent. You will be buying at the peak with very little upside potential and the distinct possibility of loss. It is not known yet if real estate markets will crash, stabilize, or slowly lose small amounts of value. It's very probable, however, that the extraordinary gains have gone out of them and that the best you can hope for is growth equal to or smaller than other types of investments. You have astutely noted that the money that you save every month by renting can be invested in something that may well gain value faster than a condo. This growth will likely outweigh the tax advantages of owning.

There is another opportunity cost you haven't considered: your down payment. Twenty percent of $250,000 is $50,000. Parked in a condo, that 50K is going to grow (or sink) at the same rate as the housing market. You could put it into stocks, or race horses, or bio-tech start-ups, or whatever, any of which might be better than housing. Finally, the transactions costs of buying and selling real estate are very high. Settlement costs and so forth drain tons of cash. To buy and then sell quickly in a falling market would be a huge waste.

For what it's worth, I will be putting my 2-bedroom condo on the market in the fall, when I can shelter my capital gains from the sale. The supply of condos where I live in Northern Virginia is enormous and it's only getting larger. Seattle may be the same.

 

[globetrotter]

J,

I have always rented. I did the calculation, 15 years ago, and it seemed to indicate that it was more economicically wise to rent. also, I could afford to live in really nice places, but if I bought I would be stuck with just an ok place. and, I didn't have all the hassles of owning.

but here is the thing - now I am 39, and I don't own a house. and I would like to. so, I am in a position where pretty much all of my friends own houses, I have little credit history, as I have also been living debt free my whole life. I am in an unusual situation, in that I had been saving pretty well all my life and I blew it on moving to the states, but that is a different thing. the point is - after deciding to buy, it will take me a couple of years to get my credit to the point where I can get a good mortgage. so, while it seemed like a great idea to rent, 15 years ago, now I am not sure.

 

[Matt]

Stick your stuff in storage and come hang out with me J

 

[Tokyo Slim]

I think sinking $50,000 into scratch tickets, mega millions, and horse racing is a good idea. Then go hang out with Mat. Just uh... "protect yourself" around the ladies if you know what I mean.

 

[tiger02]

Originally Posted by j

BTW, I am seriously considering busting out of this place (Seattle) entirely and taking a long break in some other city or a third- or second-world country to just mess around and do whatever while I am still not tied down to anything. I do somewhat value the freedom to leave, but that's not too much of a consideration as I could arrange to rent my place and e.g. sell my car or whatever to help make the payments on it. In short, I am pretty sure I could keep paying no problem if I decided to bail for a while.
This one. I can check out Kuwait City for you if you'd like

In all seriousness, I'm considering putting my lot into a developing market somewhere. It's about 50/50 right now. I'll be checking out HCMC w/ Matt and either Bangkok or Kuala Lumpur this summer, and then Ljubljana, Budapest, and Bratislava in the fall.

If I decide to take a job in the US instead, I plan to buy for all the reasons listed. I disagree with modsquad, but again this advice is worth what you're paying for it

If you're buying for the long term, it doesn't make sense to try to time the market. Stay away from the 5/1 ARMs and all the other trendy mortgages and you'll be as sheltered as you can hope for.

Tom

 

[Martinis at 8]

Tom,

KL is way cool. Not as wild as Bangkok, and not as tame as Singapore. Just the right mix of both.

M8

 

[Full Canvas]

Originally Posted by j

Where is the break even point here? Is there anything I'm not considering?

While we're in Minsk, I read the San Diego Union-Tribune online daily. As soon as we get back to La Jolla, I will ignore the rag again!

Here's a link to a recent syndicated article they printed from the NYT. While it's not exactly contrarian, it speaks to other ideas regarding a home purchase today.

http://www.signonsandiego.com/uniont...h16bubble.html
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[johnapril]

My brother in California bought a 3-bdrm condo and rented out two of the rooms. The value of the condo has nearly tripled in five years.