Resources to decide whether to buy a home?
April 14, 2015 12:14 PM   Subscribe

How can I decide whether to buy or continue renting?

Hi all,

I'm a lifelong renter, considering buying a condo or home for the first time. I don't really have an emotional need to own my own place, but I'm thinking it might be a good financial decision to do so because of the specific circumstances of my location. I found this excellent calculator that compares the total costs of renting vs buying based on your inputs of factors such as annual rise in rent, annual increase in home value, years planning on owning, maintenance costs, etc. Generally speaking, the faster home prices rise, the more it makes sense to buy, both because your investment will be worth more when you do sell, and because you avoid rapid rent increases (which presumably would happen in an area with rising home prices).

So the reason I'm thinking about buying is that I live in Charleston, SC, and the neighborhoods I'm interested in are all pretty desirable. Several large companies are moving or have announced plans to move large numbers of jobs to the area, so demand is increasing and looks to be on track to continue to do so. So it seems like things are in place for real estate prices in my areas of interest to continue increasing at a steady rate. And rates are super low. However, I don't really know anything about real estate and thus don't know how to determine (or even estimate with any degree of accuracy) how rapidly home prices will rise. I also don't know what to expect (in terms of money or time) for maintenance, average cost of replacing appliances, or other considerations that are factors with owning but not renting. So the calculator is not real useful without somewhat accurate inputs.

Now the natural suggestion is to contact a real estate agent, but I wouldn't trust the advice of an agent - their incentive is to create transactions, so I would expect them to encourage me to buy pretty much no matter what. What I'm interested in is resources (books, websites, other) that will help me to educate myself in order to determine whether to buy or not. My fear is that I keep renting and prices/rent keeps rising 5-15% a year, as it has the past couple years...but on the other hand, if I buy and then prices increase 1-2% I'll have been much better off continuing to rent because of the large transaction costs of buying.

Potentially relevant: I can afford to buy without mortgage insurance, I'm single and thus don't need a huge place (2-3 bedrooms max), neighborhoods I'm interested in are downtown, park circle, and avondale. Thank you.
posted by btkuhn to Home & Garden (4 answers total) 7 users marked this as a favorite
I have lived in various places, and used this calculator a number of times. I always get the same issue you do, that the only real factor that determines whether renting or buying is a better financial decision is the rate of house price increase/decrease, which no one can know. You just have to take your best guesses at the likely boundary numbers (worst case scenario, best case scenario) based on your local market's history, and then decide what level of risk you are comfortable with. I don't think it's reasonable anywhere to assume the market will continue to rise 15% forever, but 5% or so is possible. A completely stagnant market for years on end is also possible. Do the numbers under both those assumptions.

For maintenance and repairs, a rule of thumb is 1% of the property value per year, but I don't think that works where there are very high land values. For example, I have lived in places where the median house price is $100,000 and places where the exact same house would be worth $900,000. I don't think the annual maintenance is 9 times higher in the latter location, though!
posted by lollusc at 12:37 PM on April 14, 2015

Also, buying a property and living in it means that to sell there will be some overhead in transaction cost and volatility in the market. If you feel like settling down then I feel like home ownership makes sense. You could also put that money in some other sort of investment and keep your freedom to live wherever you want.
posted by nickggully at 12:42 PM on April 14, 2015

If you can find a cheap (local community college?) class on real estate appraisal, go take it. I have had such a class. I also used to read a lot of shelter magazines and real estate books. I bought a house in my twenties under less than optimal circumstances and made it pay off.

My sister calls paying a mortgage "paying rent to the bank." I don't agree with you that the only way it makes sense is if there is a big rise in home values. It depends in part on how long you stay there. Even modest rises really add up over time. Furthermore, you develop equity in the house. That doesn't happen when you rent. For most Americans, equity in their house accounts for more than 50% of their retirement nest egg.

This is part of why homeownership is one of the divides between the haves and the have nots. If you stay in the same place for 30 years and haven't let the house simply go to rot, at that point, you own it free and clear and you just need to pay insurance, taxes and upkeep. So your overhead is low. If you opt to sell, it can finance an RV or a smaller retirement house plus investments to live off of. Also, if you own a house free and clear, a reverse mortgage is an option to let you stay in your home and draw down the equity so you can live. This is not an option if you rent the entire time.

Yes, it's true that if you move too soon, the cost of buying and then selling a house and the lack of equity can make it a losing proposition. But you can also rent it out and hold onto it until the value goes up further and then sell. That is how I handled my situation and it made me a few thousand dollars. For me, as a full time mom and military wife, that was significant chunk of change.

There can also be tax breaks as a homeowner that renters do not get. Please look into that angle as well. I never got a tax break because my house wasn't expensive enough, but for some people that does impact the decision to buy.

Last, I will suggest that since you are single and have flexibility, you can skew the odds of this making you money by finding a house that is cheap for its neighborhood because it quite as nice as the other houses and fixing it up so it gets in line with the homes around it. Adding a second bath or a half bath to a one bath house in a neighborhood full of 1.5 or 2 bath homes can add substantial value to the house. If handled well, it can more than pay for itself. But adding a pool usually does not pay for itself. If usually is basically a sunk cost.

A class in real estate appraisal will give you some idea of what kinds of improvements will be money makers and what kind will be money wasters. If you are looking at purchasing a home primarily for the potential financial benefit, I see no reason you shouldn't treat this like a business and look to do what you can to ensure it improves in value rather than just playing the home buying lottery and hoping for a big win.

Best of luck.
posted by Michele in California at 12:51 PM on April 14, 2015 [4 favorites]

The length of time that you're willing to commit to living in the same place is one of the biggest factors in whether buying is worth it or not. Most people cite around four years as the minimum amount of time that's required to make owning worth it. If there is a reasonable chance you will want/need to leave the area entirely, your income needs to be sufficient to pay for two residences for at least a little while. Unless you're willing to sell at an aggressively low price or in an extremely desirable market, houses can take a surprisingly long amount of time on the market before you complete the sale. You might also need thousands of dollars of repairs done to make the sale happen.

Interest rates are almost certainly going to go up which may cause housing prices to stagnate, so don't count on housing prices to rise a lot, at least on a short time frame.

One of the downsides of home ownership is the maintenance - not just that you have to do it, but that getting professionals in to do the job can take a long time. If the A/C dies in the summer, you could have a week or more of misery before you find someone that will come in to repair it, whereas management companies that you rent from might have someone on staff or on retainer that can fix it in a day or two.

Many repair people only work regular hours, so you also have to be able to get away from work to let them in and supervise.

Personally, I live in a pretty desirable area where rent was increasing 10%/year and owning is cheaper than renting (my mortgage including taxes and insurance is ~75% of what renting would be, including factoring in loss in income from the investments I cashed in for the down payment) and I like the ability to modify/repaint/etc. my dwelling, so it made sense to buy. Moving is also expensive fiscally, timewise, and things getting broken and the area landlords were starting to aggressively raise rents so locking in a low payment made a lot of sense for me.
posted by Candleman at 1:04 PM on April 14, 2015 [1 favorite]

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