Rent vs. Buy 2005

[drscott]

I wrote this comment in response to dakoopst's request for advice, but it's a good advice capsule for anyone thinking about the buy vs rent decision:

It's impossible to make a complex decision like this by the numbers. Let's assume for the sake of argument that out-of-pocket costs for rents in your area are roughly similar to out-of-pocket costs for buying a comparable condo. Also assume you're committed to live in the area for at least 5 years (f you're not, don't buy) and you feel your job is secure (f not, don't buy.) To determine the relative costs, you need to simulate your tax return for a year when you rent and also for a year when you buy. You probably take the standard deduction now; if you add deductions for mortgage interest and real estate taxes, you will probably top that by a lot and get a boost from lower income taxes. People with higher incomes who already itemize can easily use a shorthand calculation: marginal tax rate (typically 40-50%) times additional deductible equals tax benefit. But you can't. Note that condo or association dues are NOT deductible.

Also in the what-if are hypothetical costs for repairs when you own. These are less likely for newer condos and more likely for older homes. Condo or homeowner fees pay for exterior maintenance, often including landscaping and some utilities, so if they are reasonable for the services provided it is foolish to try to avoid them. In many cases they are lowballed by a developer, but the deferred maintenance bites you in the ass at a later date when something requires a special assessment to fix.

Last, include in your calculation as a positive the principal repayment you are making on the loan (if any) and the expected appreciation of the unit. Expected appreciation is not going to be very high under these conditions (very low interest rates, bubbly market) -- in most areas, including yours, prices are bumping up against the local population's ability to pay, so further appreciation is less likely. Higher mortgage rates in the future would only depress prices further, and buying because current low rates make a payment affordable leaves you holding the bag when rates rise and your home price falls. You owe the money even if your house is worth less than your mortgage, and walking away from it will destroy your credit rating for many years. So a conservative guess at appreciation is zero over the next five years, and optimistically you shouldn't assume more than 3%/year. Similarly, rental costs are rising, but there's no shortage of space to build rentals there and local government is not hostile to it as they would be here, so you're relatively safe from rent increases beyond inflation.

There is a definite extra value in owning your own place. It can be torture (stuck with thuggish neighbors / nightmarish system failures / leaky roof) or wonderfully autonomous (you control your environment, plant what you want, paint as you wish, install new appliances when *you* feel like it...) In the end it's a decision only you can make. This is not one of the times when I'd urge anyone who can afford it to buy, but in the long run it usually works out.

Comments

[mrdreamjeans.livejournal.com]

I owned my home for seven years, had it designed and built. It turned out to be an emotional decision rather than a business decision when I asked my folks to sell their house and move in, as the reality was that I had to stay on the road to have the type of income to maintain it and I didn't want it to be empty for much of the time.

So, my question is... Would your advice be the same for friends who are interested in being a home-owner again, in contrast to your suggestions about purchasing a condo? The costs are different, as well as the up and down sides. I'd like to own real estate again and have to move when I am in a relatively long-term job as I am now. How would your advice change?

[dr-scott.livejournal.com]

Hmm, well, your situation is unusual. If you need financing to buy, your occupation militates against you: you look best financially when you're on the road, which is of course exactly when you don't need a big house! If you're planning on staying unattached, you already have a financial foot in the market via your house, so only you can say if you need a homestead of your own enough to justify the costs. If you get attached (and I think you are the marrying kind, fundamentally, and *someday* will hook up with the right guy for the long haul) your circumstances might well change a lot in terms of where you want to live, what kind of place, etc. So *financially* I personally would stick with what you have, and that gives you flexibility as well. Am I to gather you are thinking of a place in some city where you are thinking of settling long-term?