What do I need to know about buying vs renting?
February 12, 2012 11:56 AM Subscribe
Teach-Me-About-Renting-Vs-Buying Filter: I'm in my mid-20s and have been in my "grown up job" for about a year now, and it's about time to get my own place. What do I need to know, beyond just comparing rent and mortgage payments?
A friend of mine will be back in town this summer to start his job (the offer is already signed and accepted), and we're talking about renting a place together. Given the price of houses and rent (we're talking $80-$115k compared to a median $800 rent) in the suburbs of Milwaukee, it seems like it's worth taking a look at buying.
I know about the NYT calculator, and with our numbers we get a break-even date of 6-8 years down the road.
My questions:
-What other expenses do we need to consider? Is there a way to estimate maintenance and other owner-related costs?
-What exactly does the break-even point mean to us? What does the chart tell us about selling in a few year if our situation changes?
-What am I cluefully ignorant about that I should be asking? What sort of fees are involved with buying a house? Links to things for me to read might be helpful here. I know that 2 people buying a house together has its own special legal and social/relational considerations. I'm not asking about that yet.
Miscellaneous Details
-Neither of us have lived in traditional rental situations before. He's lived in dorms all through school, and I've lived at home except for one year at a school owned townhouse.
-We're both reasonably handy around the house
-Both of our jobs are pretty stable (as much as one can say that). Should anything change in that regard, I could most likely stay put, while he would most likely need to move out of the city, if not the state.
-My gut feeling is biased against renting, so any explanations about the financial pluses of renting could be helpful.
A friend of mine will be back in town this summer to start his job (the offer is already signed and accepted), and we're talking about renting a place together. Given the price of houses and rent (we're talking $80-$115k compared to a median $800 rent) in the suburbs of Milwaukee, it seems like it's worth taking a look at buying.
I know about the NYT calculator, and with our numbers we get a break-even date of 6-8 years down the road.
My questions:
-What other expenses do we need to consider? Is there a way to estimate maintenance and other owner-related costs?
-What exactly does the break-even point mean to us? What does the chart tell us about selling in a few year if our situation changes?
-What am I cluefully ignorant about that I should be asking? What sort of fees are involved with buying a house? Links to things for me to read might be helpful here. I know that 2 people buying a house together has its own special legal and social/relational considerations. I'm not asking about that yet.
Miscellaneous Details
-Neither of us have lived in traditional rental situations before. He's lived in dorms all through school, and I've lived at home except for one year at a school owned townhouse.
-We're both reasonably handy around the house
-Both of our jobs are pretty stable (as much as one can say that). Should anything change in that regard, I could most likely stay put, while he would most likely need to move out of the city, if not the state.
-My gut feeling is biased against renting, so any explanations about the financial pluses of renting could be helpful.
who would be buying the place? not both of you together right? so you'd have to make sure that whoever actually buys the place can afford the full mortgage payment and other household expenses if the other person decides to move out, and the person who buys the place would basically become the other's landlord.
definitely don't recommend buying the place together with your friend, I hope that's not what you're suggesting.
posted by saraindc at 12:03 PM on February 12, 2012
definitely don't recommend buying the place together with your friend, I hope that's not what you're suggesting.
posted by saraindc at 12:03 PM on February 12, 2012
Response by poster: Like I said in the question, that's outside the scope of what I'm asking right now - we're just curious how the numbers work. Maybe think of us as a young married couple for the purposes of this discussion.
posted by Nonsteroidal Anti-Inflammatory Drug at 12:09 PM on February 12, 2012
posted by Nonsteroidal Anti-Inflammatory Drug at 12:09 PM on February 12, 2012
Financial pluses to renting:
- No property taxes
- No major maintenance costs, very few minor maintenance costs
- Fixed costs (at least for the term of your lease)
- Getting out is fairly simple (subletting, buying out lease, waiting it out if it is near the end)
- No down payment needed
posted by magnetsphere at 12:09 PM on February 12, 2012 [4 favorites]
- No property taxes
- No major maintenance costs, very few minor maintenance costs
- Fixed costs (at least for the term of your lease)
- Getting out is fairly simple (subletting, buying out lease, waiting it out if it is near the end)
- No down payment needed
posted by magnetsphere at 12:09 PM on February 12, 2012 [4 favorites]
"I know that 2 people buying a house together has its own special legal and social/relational considerations. I'm not asking about that yet."
sorry my eyes are kind of weak, didn't see the small print. :/ hope others are able to be more helpful
posted by saraindc at 12:10 PM on February 12, 2012
sorry my eyes are kind of weak, didn't see the small print. :/ hope others are able to be more helpful
posted by saraindc at 12:10 PM on February 12, 2012
The best part about renting is that you don't have to worry about the things that go wrong, assuming you have a good landlord. Here's what we did just this year in/around/outside our house: new roof, new gutters, insulation, new shutters, four massive trees taken down (the emerald ash borer killed our ash trees), new furnace. Now, these big things don't always come up at the same time, but sometimes they do. In a "normal" year, you're looking at maintenance, which never ends. Who's going to cut the grass? Shovel the snow? Weed the flower beds? Winterize the house (if applicable)? Seriously, something always comes up when you're a homeowner.
That said, I hope I never have to rent again. I like being able to change the color of my house/walls whenever I want without penalty. I like choosing flowers to plant. I know I'm missing all kinds of pluses but I like owning my home.
posted by cooker girl at 12:11 PM on February 12, 2012 [2 favorites]
That said, I hope I never have to rent again. I like being able to change the color of my house/walls whenever I want without penalty. I like choosing flowers to plant. I know I'm missing all kinds of pluses but I like owning my home.
posted by cooker girl at 12:11 PM on February 12, 2012 [2 favorites]
You should be asking about two unrelated people buying a house together. That's the first thing that comes to mind, and it should be the biggest factor in your decision rather than a side note.
It's a good thing that you're looking at the NYT rent vs buy calculator. A useful feature of it is you can click on any year on the graph - for instance, if you click on year 2 of the default analysis that comes up when you open the calculator, the bottom of the page indicates that the cumulative cost of buying is $37,359 and the cumulative cost of renting is $27,681. In other words, if the house were sold on year 2, the total cost of buying a house would be ($37359 - $27681 = $9678) more than renting a place. Similarly, on year 8, the total cost of buying a place is less than the total cost of renting a place by about $23k. As an aside, you can use the "Advanced Settings" button of the NYT calculator to tweak your expenses to get a better estimate - it's biased towards the situation in New York for taxes/fees, which may or many not be anything like your locale.
As a first step, you should not be focusing on money because you don't seem to know what you want. Do you plan on marrying or having a family? If so, what happens to your roommate? Do you actively enjoy home maintenance or would you rather avoid it? Are you going to rent the place out if you want a bigger house in the future or are you going to try to sell it? Are you convinced you could buy a house right now that will serve you completely (with no modifications whatsoever) for the next ten years? If not, you should figure out how much money you will need to make it the house you want or to buy the house that you will want in ten years. That's the tricky thing about buying in your situation - you aren't buying for what you need right now, you're buying for what you need for the next ten years or so.
To answer your last question, renting is not an inherent evil thing to do. You trade the loss of equity in your house for the ability to move (more or less) whenever you need to as well as not having to deal with the variable costs of owning a home. There's something to be said for leaving yourself with some flexibility before you've even figured out what you want to do with your life.
posted by saeculorum at 12:12 PM on February 12, 2012 [1 favorite]
It's a good thing that you're looking at the NYT rent vs buy calculator. A useful feature of it is you can click on any year on the graph - for instance, if you click on year 2 of the default analysis that comes up when you open the calculator, the bottom of the page indicates that the cumulative cost of buying is $37,359 and the cumulative cost of renting is $27,681. In other words, if the house were sold on year 2, the total cost of buying a house would be ($37359 - $27681 = $9678) more than renting a place. Similarly, on year 8, the total cost of buying a place is less than the total cost of renting a place by about $23k. As an aside, you can use the "Advanced Settings" button of the NYT calculator to tweak your expenses to get a better estimate - it's biased towards the situation in New York for taxes/fees, which may or many not be anything like your locale.
As a first step, you should not be focusing on money because you don't seem to know what you want. Do you plan on marrying or having a family? If so, what happens to your roommate? Do you actively enjoy home maintenance or would you rather avoid it? Are you going to rent the place out if you want a bigger house in the future or are you going to try to sell it? Are you convinced you could buy a house right now that will serve you completely (with no modifications whatsoever) for the next ten years? If not, you should figure out how much money you will need to make it the house you want or to buy the house that you will want in ten years. That's the tricky thing about buying in your situation - you aren't buying for what you need right now, you're buying for what you need for the next ten years or so.
To answer your last question, renting is not an inherent evil thing to do. You trade the loss of equity in your house for the ability to move (more or less) whenever you need to as well as not having to deal with the variable costs of owning a home. There's something to be said for leaving yourself with some flexibility before you've even figured out what you want to do with your life.
posted by saeculorum at 12:12 PM on February 12, 2012 [1 favorite]
Neither of us have lived in traditional rental situations before. He's lived in dorms all through school, and I've lived at home except for one year at a school owned townhouse.
As gently as possible, I think under this circumstance, you are pondering premature housebuying.
posted by DarlingBri at 12:23 PM on February 12, 2012 [28 favorites]
As gently as possible, I think under this circumstance, you are pondering premature housebuying.
posted by DarlingBri at 12:23 PM on February 12, 2012 [28 favorites]
Best answer: I have to throw this out there, that as a renter, I always see people say that they love owning because they can't paint or whatnot. I have never had a landlord turn down my offer to paint my apartment (tho I might have to do it myself). I have switched out the dishwasher and other appliances when they needed to be replaced, with the landlord splitting the cost of whatever higher-end thing I wanted. Minor decorating issues like this are fairly easy to solve, especially if the other option is moving or buying. Landlords have let me plant flowers and vegetables and cut the lawn. Seriously, I think it is a rare landlord who wouldn't let you do these things. I think the only time painting or whatever comes up as an issue is when you are in college, and probably moving out after a couple of semesters.
I also recommend the NYT rent vs. buy calculator.
I would be really careful and talk to a lawyer before buying a house with a friend/other important person. I know a few people who bought houses at the top of the bubble with their current loves, and now they have broken up, and can't sell their house and are stuck living with each other. Having an agreement for who buys out who if things go bad is probably a good idea.
posted by katinka-katinka at 12:29 PM on February 12, 2012 [2 favorites]
I also recommend the NYT rent vs. buy calculator.
I would be really careful and talk to a lawyer before buying a house with a friend/other important person. I know a few people who bought houses at the top of the bubble with their current loves, and now they have broken up, and can't sell their house and are stuck living with each other. Having an agreement for who buys out who if things go bad is probably a good idea.
posted by katinka-katinka at 12:29 PM on February 12, 2012 [2 favorites]
Is there a way to estimate maintenance and other owner-related costs?
There are a lot of ballpark numbers that circulate in the "1% of value" range, in terms of a maintenance budget. I think the best approach to calculating it is "that, plus some more, and then some. And more in the first year, as you deal with all the things you overlooked when you bought the place."
As cooker girl suggests, you suddenly become very aware of this when you move from rental to ownership: there are always regular tasks, along with unforeseen things that need to be resolved quickly and the inevitable back-burner projects. Every year, the roof gets a year closer to replacement, the appliances get a year closer to planned obsolescence, and so on. There are tools to be bought, materials to be hauled in and away. It's a question of time as well as money and capability: you might be sufficiently handy, but do you have the inclination to do full-on plumbing and electrical work, and if not, do you have access to a network of trusted and skilled tradespeople to do it for you?
One problem with the prevailing culture of home ownership in the US (a culture baked in by tax advantages) is that outside big cities where house prices are extremely high, the rental market is pretty badly stocked, offering little stock or flexibility for people in your income range.
posted by holgate at 12:32 PM on February 12, 2012
There are a lot of ballpark numbers that circulate in the "1% of value" range, in terms of a maintenance budget. I think the best approach to calculating it is "that, plus some more, and then some. And more in the first year, as you deal with all the things you overlooked when you bought the place."
As cooker girl suggests, you suddenly become very aware of this when you move from rental to ownership: there are always regular tasks, along with unforeseen things that need to be resolved quickly and the inevitable back-burner projects. Every year, the roof gets a year closer to replacement, the appliances get a year closer to planned obsolescence, and so on. There are tools to be bought, materials to be hauled in and away. It's a question of time as well as money and capability: you might be sufficiently handy, but do you have the inclination to do full-on plumbing and electrical work, and if not, do you have access to a network of trusted and skilled tradespeople to do it for you?
One problem with the prevailing culture of home ownership in the US (a culture baked in by tax advantages) is that outside big cities where house prices are extremely high, the rental market is pretty badly stocked, offering little stock or flexibility for people in your income range.
posted by holgate at 12:32 PM on February 12, 2012
My gut feeling is that it is still too early for you to buy a house without the potential of it going badly. Even for married couples it is prudent to assume one partner will not be able to contribute to the household at some point (pregnancy, illness, employment) so you should budget buying or renting on just the one income (living on less means you will have more room to apply too savings, mortgage principle payoff and paying down debt). Can you afford a house on just your salary (downpayment, mortgage, maintenance, taxes, utilities and insurance, broker fees etc)?
Are you guys dating or otherwise financially entangled? Because renting as a roommate is very different to the legal entanglements of buying a house with your romantic partner. You may not be able to get a very good rate without a significant downpayment if you are not romantically involved because you are perceived as a much higher risk to the lender. His/her student loans may mean you pay more over the life of the mortgage, do you eat that difference or try to balance it out?
A year into your career you should take advantage of the flexibility you have to leverage yourself onto a career path you want. This may mean moving away for a time or switching companies; a house will prevent that and that lost opportunity cost should be factored into your decision. Will the time you need to spend on household maintenance take away time from your career? Can you afford to hire professionals for jobs outside your skill level? Do you have a lot of sick days available for you to sit at home waiting for [whatever] utility person to stop by between the hours of 8 am and 6pm to have access to the equipment inside your house on a day of their choosing?
Buying a house is a risk, you are looking at breaking even in 6-8 years, do you have the savings to take the hit if you lose a significant money on the house? What if you need to sell in five years and the housing market has crashed even lower and you are underwater by tens of thousands?
If you are really determined, I would buy a rental property and "rent" it from yourselves. This may mean a less desirable home in a less desirable location but if the situation changes suddenly you would hopefully be able to rent it out to cover some of your costs until you could sell it.
posted by saucysault at 12:37 PM on February 12, 2012 [6 favorites]
Are you guys dating or otherwise financially entangled? Because renting as a roommate is very different to the legal entanglements of buying a house with your romantic partner. You may not be able to get a very good rate without a significant downpayment if you are not romantically involved because you are perceived as a much higher risk to the lender. His/her student loans may mean you pay more over the life of the mortgage, do you eat that difference or try to balance it out?
A year into your career you should take advantage of the flexibility you have to leverage yourself onto a career path you want. This may mean moving away for a time or switching companies; a house will prevent that and that lost opportunity cost should be factored into your decision. Will the time you need to spend on household maintenance take away time from your career? Can you afford to hire professionals for jobs outside your skill level? Do you have a lot of sick days available for you to sit at home waiting for [whatever] utility person to stop by between the hours of 8 am and 6pm to have access to the equipment inside your house on a day of their choosing?
Buying a house is a risk, you are looking at breaking even in 6-8 years, do you have the savings to take the hit if you lose a significant money on the house? What if you need to sell in five years and the housing market has crashed even lower and you are underwater by tens of thousands?
If you are really determined, I would buy a rental property and "rent" it from yourselves. This may mean a less desirable home in a less desirable location but if the situation changes suddenly you would hopefully be able to rent it out to cover some of your costs until you could sell it.
posted by saucysault at 12:37 PM on February 12, 2012 [6 favorites]
And to reiterate what others have said: your gut bias against renting is not uncommon, but it's also a product of a vicious cycle in the US, akin to the gut bias against riding the bus.
In Germany, for instance, it's very different: people who have the money to buy often live in rented accommodation their entire lives, because home ownership is a hassle. That creates the opposite cycle, where you have extremely good tenant protection law (because there are lots of tenants) and a wide range of rental options.
posted by holgate at 12:42 PM on February 12, 2012 [2 favorites]
In Germany, for instance, it's very different: people who have the money to buy often live in rented accommodation their entire lives, because home ownership is a hassle. That creates the opposite cycle, where you have extremely good tenant protection law (because there are lots of tenants) and a wide range of rental options.
posted by holgate at 12:42 PM on February 12, 2012 [2 favorites]
My stepdad bought our house in 1995, when we first moved to this state. We moved out in 2001, for lots of reasons. He still has to pay the mortgage, because no one in that particular market who could afford the payments wants to live in that house for that price - rental prices are about half of mortgage payments in that area right now. So for the last decade, he's been an involuntary landlord, taking a loss of 60% of the mortgage payment (he still has to do all the maintenance) and hoping for rescue.
Just, you know, something to bear in mind.
posted by SMPA at 12:44 PM on February 12, 2012
Just, you know, something to bear in mind.
posted by SMPA at 12:44 PM on February 12, 2012
Oh, one major plus for me was that in my area (YMMV), it's very, very difficult to find a nice place to rent in a good school district. Even if you're not looking for good school districts, communities that support schools tend to be safer and quieter than communities that don't support the schools.
This may not be an issue for you but it was for us.
Seriously, I think it is a rare landlord who wouldn't let you do these things.
I wish that had been the case for me in my 11 years of renting in various cities. Perhaps it's a location thing as well.
posted by cooker girl at 12:46 PM on February 12, 2012 [1 favorite]
This may not be an issue for you but it was for us.
Seriously, I think it is a rare landlord who wouldn't let you do these things.
I wish that had been the case for me in my 11 years of renting in various cities. Perhaps it's a location thing as well.
posted by cooker girl at 12:46 PM on February 12, 2012 [1 favorite]
Best answer: The best upside to renting---and as a renter in a very low-vacancy, extremely high-demand city with blisteringly high prices---is that you can much more easily move if a couple of months into your tenancy you find you don't like it where you are, or if you find a better house somewhere else.
I hate the rental cycle of housing insecurity, price inflation and real estate agents' grasping proto-fascism with a passion that burns brightly enough to read by at night but I think what you're looking for is a rented share house.
posted by Fiasco da Gama at 12:53 PM on February 12, 2012 [1 favorite]
I hate the rental cycle of housing insecurity, price inflation and real estate agents' grasping proto-fascism with a passion that burns brightly enough to read by at night but I think what you're looking for is a rented share house.
posted by Fiasco da Gama at 12:53 PM on February 12, 2012 [1 favorite]
One factor of home ownership that is often overlooked is what I refer to as the Home Depot tax. It amounts to about $200 per month the first year you own your home and covers everything you didn't think you would need to purchase when you buy a home. You'll need to think about all of the tools (rake, snow shovel, lawn mower, etc) and accessories (rugs if you have hardwoods, ceiling fans, furnace filters) you'll need to make your house functional. If you plan on renovating or upgrading your home, your Home Depot tax can be double or triple the $200/mo amount.
Also, if you're new to Milwaukee you should consider your commuting patterns. Will you live close to work? Will you live close to a certain neighborhood? Do you want to be locked in to a certain area as soon as you arrive? What if you change jobs... will you still want to live in that area?
posted by Andy's Gross Wart at 12:55 PM on February 12, 2012 [3 favorites]
Also, if you're new to Milwaukee you should consider your commuting patterns. Will you live close to work? Will you live close to a certain neighborhood? Do you want to be locked in to a certain area as soon as you arrive? What if you change jobs... will you still want to live in that area?
posted by Andy's Gross Wart at 12:55 PM on February 12, 2012 [3 favorites]
Best answer: so any explanations about the financial pluses of renting could be helpful.
-You can move at any time if a better opportunity (financial or otherwise) comes up elsewhere.
-You can move at any time if the financial (or otherwise) situation where you are now ends up taking a turn for the worse.
-If you change your mind in terms of the lifestyle(s) you want to experience (and that can happen older than mid-20s!) you will not be trapped in a suburban Milwaukee lifestyle for years or decades by your financial obligations to your house.
-If you decide to move, or have to for some reason, you will not need to worry about selling or renting out your place.
-You are not responsible for sudden expensive emergency repairs like cracks in the walls, replacing or fixing broken appliances, trees that fall on your roof, flooding, exterminator visits, etc, etc.
-You will never have to decide between purchasing [insert cool thing you want or need here] and a furnace.
-This might vary by location, but you will probably not be paying for garbage pickup, snow removal, grass mowing and watering, etc.
-No property taxes to pay.
-You don't have to worry about the vicissitudes of the real estate market.
posted by DestinationUnknown at 12:56 PM on February 12, 2012 [5 favorites]
-You can move at any time if a better opportunity (financial or otherwise) comes up elsewhere.
-You can move at any time if the financial (or otherwise) situation where you are now ends up taking a turn for the worse.
-If you change your mind in terms of the lifestyle(s) you want to experience (and that can happen older than mid-20s!) you will not be trapped in a suburban Milwaukee lifestyle for years or decades by your financial obligations to your house.
-If you decide to move, or have to for some reason, you will not need to worry about selling or renting out your place.
-You are not responsible for sudden expensive emergency repairs like cracks in the walls, replacing or fixing broken appliances, trees that fall on your roof, flooding, exterminator visits, etc, etc.
-You will never have to decide between purchasing [insert cool thing you want or need here] and a furnace.
-This might vary by location, but you will probably not be paying for garbage pickup, snow removal, grass mowing and watering, etc.
-No property taxes to pay.
-You don't have to worry about the vicissitudes of the real estate market.
posted by DestinationUnknown at 12:56 PM on February 12, 2012 [5 favorites]
Is there a way to estimate maintenance and other owner-related costs?
It depends on the house. Our house was built in 1895. We did a complete reno when we bought 3.5 years ago. This was our first house purchase and we were 36 at the time. Our goal is to put 10% of every mortgage payment into a maintenance account. We fail at this but this is probably what we go through every year, cumulatively.
This month, we are replacing a kitchen tap that snapped (120 tap, 70 labor because... just never mind why), replacing an inefficient bathroom heater that predates us (225 plus labor), and we've had the chimney swept (60) for the first time in 100 years. We are doing these things because we suddenly have the cash to do so. Other things we have put off and are still not dealing with include a leaking roof caused by a neighbour (2K?), repainting from the leaking roof, and oh yeah clearing the ivy encroaching from an adjoining public enbankment (400 or 200 if we rent equipment and contact our own haulage).
We also pay mortgage insurance, home insurance and property tax. Our life insurance I also include in the cost of home ownership as it specifically includes a clause that pays off the mortgage is one of us dies. You would also need such coverage.
posted by DarlingBri at 1:13 PM on February 12, 2012
It depends on the house. Our house was built in 1895. We did a complete reno when we bought 3.5 years ago. This was our first house purchase and we were 36 at the time. Our goal is to put 10% of every mortgage payment into a maintenance account. We fail at this but this is probably what we go through every year, cumulatively.
This month, we are replacing a kitchen tap that snapped (120 tap, 70 labor because... just never mind why), replacing an inefficient bathroom heater that predates us (225 plus labor), and we've had the chimney swept (60) for the first time in 100 years. We are doing these things because we suddenly have the cash to do so. Other things we have put off and are still not dealing with include a leaking roof caused by a neighbour (2K?), repainting from the leaking roof, and oh yeah clearing the ivy encroaching from an adjoining public enbankment (400 or 200 if we rent equipment and contact our own haulage).
We also pay mortgage insurance, home insurance and property tax. Our life insurance I also include in the cost of home ownership as it specifically includes a clause that pays off the mortgage is one of us dies. You would also need such coverage.
posted by DarlingBri at 1:13 PM on February 12, 2012
Best answer: Given your situations, I think that renting makes more sense.
There are many things that you learn about through renting that are really important for owning. Things like insulation, HVAC systems, how much it cost to get your toilet fixed, having the windows face the right direction for the most heat... This is gained through years of renting different places and not gained as much in the housing situations that you guys have been in.
You know how when you go to a wedding, you make a little mental list of stuff you like and don't like? "Oh, they made a really poor choice hiring a DJ for this crowd" or "Having 3rd cousins sing a chant with a ukelele doesn't really work for me" or "Ooh, I loved how they had a mashed potato bar!"....
Well, renting is sort of like that. You start generating a list of what you can and cannot live with. "I'll never again live in a house with electric heat!" "I need to have a garbage disposal." "I have to have an office with a lot of windows because I can't work without sunlight." "I don't really need a dining room with my habits." "Dishwashers get stinky if you don't prewash the dishes, but I love having a dishwasher." "I love wood floors."
So I wouldn't recommend that you buy a house without having these years of lists built up.
posted by k8t at 1:19 PM on February 12, 2012 [10 favorites]
There are many things that you learn about through renting that are really important for owning. Things like insulation, HVAC systems, how much it cost to get your toilet fixed, having the windows face the right direction for the most heat... This is gained through years of renting different places and not gained as much in the housing situations that you guys have been in.
You know how when you go to a wedding, you make a little mental list of stuff you like and don't like? "Oh, they made a really poor choice hiring a DJ for this crowd" or "Having 3rd cousins sing a chant with a ukelele doesn't really work for me" or "Ooh, I loved how they had a mashed potato bar!"....
Well, renting is sort of like that. You start generating a list of what you can and cannot live with. "I'll never again live in a house with electric heat!" "I need to have a garbage disposal." "I have to have an office with a lot of windows because I can't work without sunlight." "I don't really need a dining room with my habits." "Dishwashers get stinky if you don't prewash the dishes, but I love having a dishwasher." "I love wood floors."
So I wouldn't recommend that you buy a house without having these years of lists built up.
posted by k8t at 1:19 PM on February 12, 2012 [10 favorites]
I lived in rent houses for 10 years before I bought, and k8t's point about experience is really good. You're prejudiced against renting when you've never done it, which is a really huge blind spot you need to take into consideration.
The other blind spot is that you have no idea how your career is going to play out this early in the game. You can't reasonably predict where you'll be in 2 years, much less the 10+ before you have any real equity in the place.
I now own a house I never should have bought in a state I no longer live in and have no intention of returning to. We rent it out because we couldn't sell it instantly, and we're renting at a loss, and it is an enormous albatross in so many ways. And we will likely have to rent it out for years, then deal with the nightmare of selling it from 1500 miles away.
We rent now in our new state, and probably always will. I think money would have to just be falling out of my butt for me to tie myself down like that again.
posted by Lyn Never at 1:41 PM on February 12, 2012
The other blind spot is that you have no idea how your career is going to play out this early in the game. You can't reasonably predict where you'll be in 2 years, much less the 10+ before you have any real equity in the place.
I now own a house I never should have bought in a state I no longer live in and have no intention of returning to. We rent it out because we couldn't sell it instantly, and we're renting at a loss, and it is an enormous albatross in so many ways. And we will likely have to rent it out for years, then deal with the nightmare of selling it from 1500 miles away.
We rent now in our new state, and probably always will. I think money would have to just be falling out of my butt for me to tie myself down like that again.
posted by Lyn Never at 1:41 PM on February 12, 2012
To add to my "stuff that is good to know" thoughts...
Being in roommate situations with people where you're financially tied to each other is a skill. OWNING with someone else is even tougher. And owning with someone that you don't have legal ties to is especially tough.
posted by k8t at 1:42 PM on February 12, 2012
Being in roommate situations with people where you're financially tied to each other is a skill. OWNING with someone else is even tougher. And owning with someone that you don't have legal ties to is especially tough.
posted by k8t at 1:42 PM on February 12, 2012
What other expenses do we need to consider?
Houses need roofs. The lawn requires equipment (lawn mower, etc.), time, and other materials (like fertilizer). Appliances will break down. A storm will come through and blow down part of the fence. A house without furniture will seem weird, so there's that purchase. Homeowners association dues (possibly) and property tax. The electric bill is higher than an apartment, even though you usually have better construction.
My main point is, all of these (except furniture) have to be paid immediately when they are due. If the water heater goes out, you get a water heater that day. If the fence blows down, you repair it that day. This requires a slush fund of money to draw from for "emergencies" except they aren't emergencies -- they are just part of home ownership, the part where the bills are known but the exact cost and timing aren't known. It is possible to have the AC, fence, and water heater go out in the same month that your car needs a new transmission and you've just been downsized from your job.
What does the chart tell us about selling in a few year if our situation changes?
The common wisdom (before the latest economic crisis) was that you needed to be in your home for 5 years before selling it, if you ever hope to make back what you spent on fees when you bought it. Although times have changed recently, the basic idea is still valid -- you need to stay put in the house for a while. Don't buy thinking it's a short-term arrangement unless you are willing to lose money. If you find that (for a romantic interest, a better job, a change of scenery, whatever) you want to just pick up and go... well, you really can't with a house. Yes, you can sell it, but to get an offer, with a good price that recoups your costs, well that takes time. Sometimes a long time.
posted by Houstonian at 1:53 PM on February 12, 2012 [1 favorite]
Houses need roofs. The lawn requires equipment (lawn mower, etc.), time, and other materials (like fertilizer). Appliances will break down. A storm will come through and blow down part of the fence. A house without furniture will seem weird, so there's that purchase. Homeowners association dues (possibly) and property tax. The electric bill is higher than an apartment, even though you usually have better construction.
My main point is, all of these (except furniture) have to be paid immediately when they are due. If the water heater goes out, you get a water heater that day. If the fence blows down, you repair it that day. This requires a slush fund of money to draw from for "emergencies" except they aren't emergencies -- they are just part of home ownership, the part where the bills are known but the exact cost and timing aren't known. It is possible to have the AC, fence, and water heater go out in the same month that your car needs a new transmission and you've just been downsized from your job.
What does the chart tell us about selling in a few year if our situation changes?
The common wisdom (before the latest economic crisis) was that you needed to be in your home for 5 years before selling it, if you ever hope to make back what you spent on fees when you bought it. Although times have changed recently, the basic idea is still valid -- you need to stay put in the house for a while. Don't buy thinking it's a short-term arrangement unless you are willing to lose money. If you find that (for a romantic interest, a better job, a change of scenery, whatever) you want to just pick up and go... well, you really can't with a house. Yes, you can sell it, but to get an offer, with a good price that recoups your costs, well that takes time. Sometimes a long time.
posted by Houstonian at 1:53 PM on February 12, 2012 [1 favorite]
I'd also like to add that I talked with a realtor friend this week and asked how business was going. Of the many things he shared, he said that many first-time buyers just don't understand how dramatically different (and difficult) it is for them to get approved for a mortgage these days. Before going through all the debates of the pros and cons of home ownership, you should just apply for a pre-approval of a mortgage. If you have excellent credit, a long-ish credit history, a good-paying and stable job and job history, and 20% down, then maybe you can get a mortgage. If you are young with a bright future but not much history to point to, and not really 20% or more down, then maybe not.
It costs nothing to apply, and may help you decide immediately without itemizing costs and worrying about legal implications. Find out if you even have the choice right now.
posted by Houstonian at 2:11 PM on February 12, 2012 [2 favorites]
It costs nothing to apply, and may help you decide immediately without itemizing costs and worrying about legal implications. Find out if you even have the choice right now.
posted by Houstonian at 2:11 PM on February 12, 2012 [2 favorites]
Best answer: Of the many things he shared, he said that many first-time buyers just don't understand how dramatically different (and difficult) it is for them to get approved for a mortgage these days. Before going through all the debates of the pros and cons of home ownership, you should just apply for a pre-approval of a mortgage. If you have excellent credit, a long-ish credit history, a good-paying and stable job and job history, and 20% down, then maybe you can get a mortgage.
Absolutely. Pre-approval means nothing. I had a 793 credit score and could not get a conventional mortgage because my house needed minor repairs. Banks do not want to lend at all right now. My whole homebuying experience was horrid from start to finish. It took us three and a half months to close and if we had closed even one day later I would have lost the house. The bank (Wells Fargo, not my choice, I wouldn't wish them on my worst enemy) did not care. Every time all the contingencies seemed to be satisfied they came up with more. If I had known it was going to be so bad I would never have done it. I think I cried every single day until closing.
On the upside, my mortgage payment (even including taxes and insurance) is more than $300 less than what I was paying for a crappy apartment, and I love my house. But the process was just unbelievably horrible. It blew me away how bad it was. I had no idea.
posted by Violet Hour at 3:47 PM on February 12, 2012
Absolutely. Pre-approval means nothing. I had a 793 credit score and could not get a conventional mortgage because my house needed minor repairs. Banks do not want to lend at all right now. My whole homebuying experience was horrid from start to finish. It took us three and a half months to close and if we had closed even one day later I would have lost the house. The bank (Wells Fargo, not my choice, I wouldn't wish them on my worst enemy) did not care. Every time all the contingencies seemed to be satisfied they came up with more. If I had known it was going to be so bad I would never have done it. I think I cried every single day until closing.
On the upside, my mortgage payment (even including taxes and insurance) is more than $300 less than what I was paying for a crappy apartment, and I love my house. But the process was just unbelievably horrible. It blew me away how bad it was. I had no idea.
posted by Violet Hour at 3:47 PM on February 12, 2012
I rented for 14 years, and then my husband and I bought a place last year. When we were looking for a house to buy, we had a list of all the things we had ever hated about our rentals, and we used that to rule places out. (Low water pressure, leaking roof, draughty windows, lack of insulation, carpeted bathroom(!), creaky stairs, huge backyard with lots of lawn to mow, bedroom window facing busy street, etc). And we knew the telltale signs for identifying things like leaky roofs, because we had lived in places where the landlord tried to cover it up.
It will be harder, but not impossible, for you to figure out what you want and don't want in a house, and what you don't really want but can live with, vs absolutely no compromises issues, if you haven't rented.
Also, people always say that rent is throwing your money away, but they seem to conveniently ignore how interest on your mortgage is also money thrown away. And they also tend to forget that the money saved by renting (i.e. taxes, water, rates, down payment, interest, and the usually higher cost of the monthly payments) can be saved, earning interest, and eventually offsets your rent payment entirely. So just as you one day are mortgage-free; you are also one day rent-free, because your rent is being paid out of the interest earned on your savings. People think this sounds unrealistic, but we were nearly at that point when we stopped renting. Our interest on our savings account covered 75% of the rent in our final year before we bought.
The NYT calculator says it takes opportunity costs into account, but they don't ask you to input the interest you are earning on those savings, so I'm not sure how exactly they are calculating it.
posted by lollusc at 4:30 PM on February 12, 2012 [5 favorites]
It will be harder, but not impossible, for you to figure out what you want and don't want in a house, and what you don't really want but can live with, vs absolutely no compromises issues, if you haven't rented.
Also, people always say that rent is throwing your money away, but they seem to conveniently ignore how interest on your mortgage is also money thrown away. And they also tend to forget that the money saved by renting (i.e. taxes, water, rates, down payment, interest, and the usually higher cost of the monthly payments) can be saved, earning interest, and eventually offsets your rent payment entirely. So just as you one day are mortgage-free; you are also one day rent-free, because your rent is being paid out of the interest earned on your savings. People think this sounds unrealistic, but we were nearly at that point when we stopped renting. Our interest on our savings account covered 75% of the rent in our final year before we bought.
The NYT calculator says it takes opportunity costs into account, but they don't ask you to input the interest you are earning on those savings, so I'm not sure how exactly they are calculating it.
posted by lollusc at 4:30 PM on February 12, 2012 [5 favorites]
Oh, and those calculators are kind of iffy, anyway. It makes an enormous difference what numbers you put in for estimation of increase in housing value, which is by definition a number you are just going to have to make up out of your imagination.
If we assume a 3% increase in housing value, but a 5% increase in rent, it will take 16 years to break even. With a 5% increase in housing value, it will take us 6 years. Taking the figures for the year before we bought as average (10% increase in rental prices and 7% in housing values, in our suburb), it would have been three years until we broke even. Now, one year later, houses have decreased by 2% and rental prices risen by another 10%, so now it claims it will take 18 years until we would have been better off not renting.
So don't rely on the calculator too much. I think the best way to use it is to plug in the worst case scenario figures, and use those to decide if buying is a dealbreaker for you under those circumstances.
posted by lollusc at 5:47 PM on February 12, 2012
If we assume a 3% increase in housing value, but a 5% increase in rent, it will take 16 years to break even. With a 5% increase in housing value, it will take us 6 years. Taking the figures for the year before we bought as average (10% increase in rental prices and 7% in housing values, in our suburb), it would have been three years until we broke even. Now, one year later, houses have decreased by 2% and rental prices risen by another 10%, so now it claims it will take 18 years until we would have been better off not renting.
So don't rely on the calculator too much. I think the best way to use it is to plug in the worst case scenario figures, and use those to decide if buying is a dealbreaker for you under those circumstances.
posted by lollusc at 5:47 PM on February 12, 2012
The only reason you should buy a place is if you know you are going to stay there long term, and you know you will love the house. Unfortunately, without living in several rentals, it's hard to learn what you will and won't like. In addition, If the two of you buy a place, and then something doesn't work out and you want to move in the first few years, you are kind of screwed. I've known quite a few good friends who were terrible room mates. Also, what happens if one of you wants to get married in a couple of years, who gets the house? In your situation I would never even consider buying a house right now, since the chance of something going wrong or buying something you turn out not to like is too high. If only one major thing goes wrong a few years down the line, all of the savings you may get from long term ownership could be completely wiped out.
posted by markblasco at 6:02 PM on February 12, 2012 [1 favorite]
posted by markblasco at 6:02 PM on February 12, 2012 [1 favorite]
Best answer: Young recent homebuyer here. As a counterpoint, I had no problem getting approval with less than 20% down. This experience may not be typical.
I see you're in Wisconsin. Transfer taxes vary by jurisdiction, as does who pays them. Here's a chart, can't vouch for its accuracy.
I agree with the upthread comment -- 0.5% to 1% of cost is a good estimate for maintenance costs, and for renovation costs too, another 0.5% to 1%. However, if the house isn't brand new, the first year will usually be much worse. I'm dealing with 40 years of deferred maintenance and have dropped something like 3% in the last six months.
You'll have to pay appraisal fees (a few hundred bucks), maybe an application fee, maybe points on the mortgage (0.5%-1% of the loan amount, depends on your loan), title insurance (a few hundred bucks), a home inspection (a few hundred bucks), probably more stuff I'm not thinking of.
On the upside, interest rates are crazy low right now. From my point of view, buying was worth doing not just to avoid the annoyances and transience of renting, but to have an incredibly low rate in 10 years if I'm still in the house. At that point the debt is comically cheap. There's a limited market for rental houses in NYC but I suspect I'm still coming out ahead.
Interest on loans is tax-deductible, but you have to itemize deductions to take advantage of this. if you pay more than $5800 in WI income tax this will not be a concern -- every interest dollar is effectively tax-free after that magic number.
There are many more considerations as well. Homeowner's insurance, property tax, utilities that you don't have to pay as a renter...
posted by zvs at 6:04 PM on February 12, 2012
I see you're in Wisconsin. Transfer taxes vary by jurisdiction, as does who pays them. Here's a chart, can't vouch for its accuracy.
I agree with the upthread comment -- 0.5% to 1% of cost is a good estimate for maintenance costs, and for renovation costs too, another 0.5% to 1%. However, if the house isn't brand new, the first year will usually be much worse. I'm dealing with 40 years of deferred maintenance and have dropped something like 3% in the last six months.
You'll have to pay appraisal fees (a few hundred bucks), maybe an application fee, maybe points on the mortgage (0.5%-1% of the loan amount, depends on your loan), title insurance (a few hundred bucks), a home inspection (a few hundred bucks), probably more stuff I'm not thinking of.
On the upside, interest rates are crazy low right now. From my point of view, buying was worth doing not just to avoid the annoyances and transience of renting, but to have an incredibly low rate in 10 years if I'm still in the house. At that point the debt is comically cheap. There's a limited market for rental houses in NYC but I suspect I'm still coming out ahead.
Interest on loans is tax-deductible, but you have to itemize deductions to take advantage of this. if you pay more than $5800 in WI income tax this will not be a concern -- every interest dollar is effectively tax-free after that magic number.
There are many more considerations as well. Homeowner's insurance, property tax, utilities that you don't have to pay as a renter...
posted by zvs at 6:04 PM on February 12, 2012
(By "limited market" I mean "limited data." In most cities it's easier to make an equitable comparison.)
posted by zvs at 6:08 PM on February 12, 2012
posted by zvs at 6:08 PM on February 12, 2012
I really just want to second what k8t said. If you've never even rented a place before, you really need to do that first - you need to figure out what you like and dislike (as k8t said) - for example, I will never ever buy a house that does not have a gas stove. My husband thinks I'm crazy, but it's a complete deal breaker for me. I wouldn't have known this 10 years ago, but figured it out after living in an apartment for a while with one of those ceramic cooktops that drove me insane.
Also, especially if you've never had a roommate before or never been roommates with this particular person before, the last thing in the world that you want to do is make such a huge financial commitment together. What if you can't stand living with each other?
posted by echo0720 at 6:23 PM on February 12, 2012
Also, especially if you've never had a roommate before or never been roommates with this particular person before, the last thing in the world that you want to do is make such a huge financial commitment together. What if you can't stand living with each other?
posted by echo0720 at 6:23 PM on February 12, 2012
we're talking $80-$115k compared to a median $800 rent
I think you can put some faith in some basic economic principles instead of fussing over specific numbers. In a competitive market, which housing almost always is, neither renting nor buying is going to be a better deal for an average consumer. Assuming (and this is not a fully reasonable assumption, but consider it anyhow) that consumers have the choice of how to spend their money, the prices of competing packages of goods tend to adjust so that the average buyer is indifferent between their choices at a given price. Absent constraints on those choices, an average consumer will be just as happy renting at the typical cost of rent as they will be buying at the typical cost of buying. People choose whether to rent or buy on the basis of factors other than price, because in the end the prices of the different options are a wash.
I'm talking in broad generalities that gloss over some significant considerations. Right now, because banks are being unusually cautious with their lending, it's harder to get a mortgage. This puts some downward pressure on home sale prices, and forces more people to rent, driving up rental rates. For that reason, it actually may be a good time for the average consumer to buy a house if they can and want to. BUT, the difference in total costs that results from restrictions in available credit is generally going to be quite small, while the difference between your personal life situation and that of a mathematically, statistically average consumer is probably quite large. You can be virtually certain that issues like where you are in your career and relationships, and whether owning or renting, with all their attendant risks and rewards and joys and frustrations, is a better fit for your particular lifestyle preferences, are far more important factors than any calculable differences in cash cost.
posted by jon1270 at 4:36 AM on February 13, 2012
I think you can put some faith in some basic economic principles instead of fussing over specific numbers. In a competitive market, which housing almost always is, neither renting nor buying is going to be a better deal for an average consumer. Assuming (and this is not a fully reasonable assumption, but consider it anyhow) that consumers have the choice of how to spend their money, the prices of competing packages of goods tend to adjust so that the average buyer is indifferent between their choices at a given price. Absent constraints on those choices, an average consumer will be just as happy renting at the typical cost of rent as they will be buying at the typical cost of buying. People choose whether to rent or buy on the basis of factors other than price, because in the end the prices of the different options are a wash.
I'm talking in broad generalities that gloss over some significant considerations. Right now, because banks are being unusually cautious with their lending, it's harder to get a mortgage. This puts some downward pressure on home sale prices, and forces more people to rent, driving up rental rates. For that reason, it actually may be a good time for the average consumer to buy a house if they can and want to. BUT, the difference in total costs that results from restrictions in available credit is generally going to be quite small, while the difference between your personal life situation and that of a mathematically, statistically average consumer is probably quite large. You can be virtually certain that issues like where you are in your career and relationships, and whether owning or renting, with all their attendant risks and rewards and joys and frustrations, is a better fit for your particular lifestyle preferences, are far more important factors than any calculable differences in cash cost.
posted by jon1270 at 4:36 AM on February 13, 2012
As a recent home buyer, I'd vote for rent first.
And when you do buy, figure that everything will cost at least 10% more than what anyone tells you and be prepared to insist - to your dying breath - that you do not want to spend as much as the mortgage broker and the real estate agent tell you you can spend. There's a tendency to inflate your wealth and income; its much better to pretend you are poorer than you really are.
posted by RandlePatrickMcMurphy at 6:22 AM on February 13, 2012
And when you do buy, figure that everything will cost at least 10% more than what anyone tells you and be prepared to insist - to your dying breath - that you do not want to spend as much as the mortgage broker and the real estate agent tell you you can spend. There's a tendency to inflate your wealth and income; its much better to pretend you are poorer than you really are.
posted by RandlePatrickMcMurphy at 6:22 AM on February 13, 2012
Do you understand the economic factors involved? Usually your rent (r) is less then the Mortgage repayment (m) so if your possible savings (s) are s = m - r.
Buying is like a bet that the net increase in value of the flat / house/ apartment (less upfront costs, maintenance, resale costs, but plus tax breaks on Interest ) is greater than the return that you can get by simply sticking the (s) savings in some other investment / bank.
So economically you really want to look into the forecasts for the housing market. In many places these are really low for the next few years (and could be less than 0%).
On the other hand renting is easy, flexible and actually quite convenient and carefree when you are younger. I've been doing it for about 18 years..
posted by mary8nne at 7:02 AM on February 13, 2012 [1 favorite]
Buying is like a bet that the net increase in value of the flat / house/ apartment (less upfront costs, maintenance, resale costs, but plus tax breaks on Interest ) is greater than the return that you can get by simply sticking the (s) savings in some other investment / bank.
So economically you really want to look into the forecasts for the housing market. In many places these are really low for the next few years (and could be less than 0%).
On the other hand renting is easy, flexible and actually quite convenient and carefree when you are younger. I've been doing it for about 18 years..
posted by mary8nne at 7:02 AM on February 13, 2012 [1 favorite]
N-thng the rent first people because they're right: you don't know what you like until you know what you hate.
posted by AmandaA at 7:02 AM on February 13, 2012
posted by AmandaA at 7:02 AM on February 13, 2012
Never buy a house unless you are prepared to be stuck living there for 10 years.
posted by gjc at 7:06 AM on February 13, 2012 [1 favorite]
posted by gjc at 7:06 AM on February 13, 2012 [1 favorite]
Whoa whoa slight derail: I've just played with that NYT calculator. Is it accurate?! According to it (assuming it's accurate and works for Ontario) given the current cost of homes in my area and the rent for equivalent rentals it will literally NEVER be better to buy.
Yikes.
posted by AmandaA at 7:12 AM on February 13, 2012
Yikes.
posted by AmandaA at 7:12 AM on February 13, 2012
Best answer: Three financial things to think about buying a home:
1) It is the only leveraged purchase most people ever make. That means that you own the house, but are renting the money you used to buy it. If the price of the house goes up, you get to keep all the gains. If it goes down, you eat the losses in most cases. Look at it this way: if you buy a $100K house, you put $20K down and borrow $80K. If when you sell it is up 10% and worth $110K, you pay back the $80K and pocket $30K - congratulations you made 50% on the 20K you put down. If it is down 10%, then you sell it for $90K, then sorry that you lost 50% of what you put down.
2) The costs of selling the house can be very high, making the loses from leverage worse and limiting the gains. Besides taxes and closing costs (the cost of getting the loan and all the legal stuff that goes into registering the property transfer legally), you have to pay the real estate agents as well. In my area, that is customarily 6% of the cost of the house. So if you put $20K down, buy the house, then have a falling out and have to sell the house the next day for what you paid for it, you are down at least 6% of the purchase price, which is about a third of what you put down. Ouch.
3) There is a tax benefit, in that you don't pay income taxes in the interest part of the mortgage payment. This may or may not be of benefit depending on your income tax bracket.
posted by procrastination at 7:15 AM on February 13, 2012 [1 favorite]
1) It is the only leveraged purchase most people ever make. That means that you own the house, but are renting the money you used to buy it. If the price of the house goes up, you get to keep all the gains. If it goes down, you eat the losses in most cases. Look at it this way: if you buy a $100K house, you put $20K down and borrow $80K. If when you sell it is up 10% and worth $110K, you pay back the $80K and pocket $30K - congratulations you made 50% on the 20K you put down. If it is down 10%, then you sell it for $90K, then sorry that you lost 50% of what you put down.
2) The costs of selling the house can be very high, making the loses from leverage worse and limiting the gains. Besides taxes and closing costs (the cost of getting the loan and all the legal stuff that goes into registering the property transfer legally), you have to pay the real estate agents as well. In my area, that is customarily 6% of the cost of the house. So if you put $20K down, buy the house, then have a falling out and have to sell the house the next day for what you paid for it, you are down at least 6% of the purchase price, which is about a third of what you put down. Ouch.
3) There is a tax benefit, in that you don't pay income taxes in the interest part of the mortgage payment. This may or may not be of benefit depending on your income tax bracket.
posted by procrastination at 7:15 AM on February 13, 2012 [1 favorite]
re AmandaA: It's probably not accurate for Ontario. The first obvious differences that come to mind are deductions for mortgage interest, which do not exist in Canada IIRC, and capital gains applicability to profits from the house sale. That said, these favors skew in favor of renting, so it may be even worse!
posted by zvs at 12:46 PM on February 13, 2012
posted by zvs at 12:46 PM on February 13, 2012
This thread is closed to new comments.
posted by Nonsteroidal Anti-Inflammatory Drug at 11:58 AM on February 12, 2012