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Should I buy or rent a place?

Discussion in 'Fine Living, Home, Design & Auto' started by j, May 2, 2006.

  1. j

    j Senior member Admin

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    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.
     
  2. Martinis at 8

    Martinis at 8 Senior member

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

    M8
     
  3. WatchGuy

    WatchGuy Senior member

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    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.
     
  4. Ambulance Chaser

    Ambulance Chaser Senior member

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    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.
     
  5. Dakota rube

    Dakota rube Senior member

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    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
     
  6. zjpj83

    zjpj83 Senior member

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    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.
     
  7. countdemoney

    countdemoney Senior member

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

    modsquad Senior member

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    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.
     
  9. globetrotter

    globetrotter Senior member

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    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.
     
  10. Matt

    Matt Senior member

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    Stick your stuff in storage and come hang out with me J
     
  11. Tokyo Slim

    Tokyo Slim Senior member

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    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.
     
  12. tiger02

    tiger02 Senior member

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    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 [​IMG]

    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 [​IMG] 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
     
  13. Martinis at 8

    Martinis at 8 Senior member

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    Angola
    Tom,

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

    M8
     
  14. Full Canvas

    Full Canvas Senior member

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    La Jolla, Cargese, Minsk
    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
    __________________________________________
     
  15. johnapril

    johnapril Senior member

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    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.
     
  16. globetrotter

    globetrotter Senior member

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    J,

    if you seriously consider moving abroad for a while, think about the skills you have. if I remember correctly, you are managing a mixing plant or a contracting company, right? you may be able to get a job with a mulinational construction company, or possibly even a local company, involved in the construction business someplace. this would give you a great base to do your exploring, and you may be able to make some good money.

    I think that the biggest construction in the world is going on right now in Dubai - that or shanghai. there is probrably zero chance you could work in the building industry in china, but a good chance you coujld get a job doing something very similar to what you are doing today in Dubai.

    if you have any questions about specific points, feel free to pm me.
     
  17. Tokyo Slim

    Tokyo Slim Senior member

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    but a good chance you coujld get a job doing something very similar to what you are doing today in Dubai.

    Hmmm... I dunno about that.

    [​IMG]
     
  18. briancl

    briancl Senior member

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    My anecdote..

    My friends and I have been through the same thought process as you, and unfortunately, we live in one of the top 3 worst housing markets in the country (Detroit). I have friends who purchased within the last 1-2 years that wish they hadn't. I have friends looking to purchase now that simply cannot since the prices are much higher than the properties are worth, even looking at a 4 or 5 year term. After talking with professionals as well as savvy amateurs, it seems to make no sense to buy in Detroit today unless this is going to be at least a 6 or 7 year investment.

    Then, add to that, the fact that Detroit could possibly decline even faster than it is today with all of the problems that Ford and GM are having. Too much volatiliy for me. Additionally, I am not committed to live in Detroit for any length of time, especially if the economy tanks.

    I have an income that could easily support purchasing a home similar or better than the one I rent, but I don't have 40-50k handy for a down payment, and if I did, I'm not sure I'd invest it in real estate in Detroit.

    I think Detroit has been ahead of the curve of this housing boom. There was certainly a boom here, but it died off a bit quicker here for a number of reasons. I'm sure Seattle is different, but this could be a glimpse of the future.

    Right now I think I will rent for another year and then move to Chicago or DC and rent there for a year to figure out the best move all while saving up a hefty downpayment by keeping my money in index funds..

    Also, FWIW, there was a good article in the most recent Details about a guy around our age who rents and feels some pressure from friends/family, but is overall happy with his decision.
     
  19. tiger02

    tiger02 Senior member

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    J, any new thoughts?
     
  20. j

    j Senior member Admin

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    J, any new thoughts?
    Nothing concrete. Thanks all for the advice. It looks like I may have a couple of potential roommates to take up some of the rent for the next month or so while I figure out what I want to do. I still need to go get prequalified to see if I am even being realistic. In the meantime I also need to pare down my collection of extraneous crap, including a bunch of musical gear and tons of clothes....
     

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