Rent versus buy, rapidly growing city edition
May 24, 2018 8:45 AM Subscribe
We can’t decide whether to buy a house or to keep renting our (wonderful) apartment. The only reason we have any interest in buying is to avoid being priced out of our hometown in the coming years. Help?
I live in one of the fastest-growing cities in the country, which is also consistently listed as one of the hottest real estate markets in the country. The escalation in home prices in the last couple of years has been unreal. Buying a home is incredibly competitive right now, with homes selling in less than a day, people waiving inspections and paying well over market value for otherwise unremarkable homes.
We have been renting a house for about a decade. The house is awesome—pretty much my dream home. The landlord has never raised the rent on us. It’s very affordable right now.
However, I see the writing on the wall in terms of what’s happening around us. Rents are skyrocketing. Sooner or later the landlord is going to have to raise the rent or sell the place. I’m thinking long-term here: what happens to us in fifteen years when we can no longer stay in this house, but the city is as expensive to live in as Boston, Seattle or Denver? We don’t want to leave the city. We are both civil servants. Our jobs are stable but we will never make a lot of money. I spent most of my life before now living in crappy apartments, and I really don’t want to go back.
It would make sense for us to get in a home right now, while interest rates are still low and there are still affordable homes. However, we really, really don’t want to move. We don’t want to be homeowners. Everything we want in a house we have here. We don’t have to deal with the grunt work of home maintenance. We don’t have a down payment saved up. We could probably manage a six percent down payment if we really stretched.
I’m worried if we dive into home ownership we will regret leaving our very good situation for something we are “meh” about, just to lock in a home price. But then I’m worried that me from 20 years from now will be kicking current me if we don’t.
I know there’s no great answer here. This previous question gave me much to think about, and many of the answers were along the lines of “buy now while you can still afford it.” But, ugh. I just don’t want to.
I live in one of the fastest-growing cities in the country, which is also consistently listed as one of the hottest real estate markets in the country. The escalation in home prices in the last couple of years has been unreal. Buying a home is incredibly competitive right now, with homes selling in less than a day, people waiving inspections and paying well over market value for otherwise unremarkable homes.
We have been renting a house for about a decade. The house is awesome—pretty much my dream home. The landlord has never raised the rent on us. It’s very affordable right now.
However, I see the writing on the wall in terms of what’s happening around us. Rents are skyrocketing. Sooner or later the landlord is going to have to raise the rent or sell the place. I’m thinking long-term here: what happens to us in fifteen years when we can no longer stay in this house, but the city is as expensive to live in as Boston, Seattle or Denver? We don’t want to leave the city. We are both civil servants. Our jobs are stable but we will never make a lot of money. I spent most of my life before now living in crappy apartments, and I really don’t want to go back.
It would make sense for us to get in a home right now, while interest rates are still low and there are still affordable homes. However, we really, really don’t want to move. We don’t want to be homeowners. Everything we want in a house we have here. We don’t have to deal with the grunt work of home maintenance. We don’t have a down payment saved up. We could probably manage a six percent down payment if we really stretched.
I’m worried if we dive into home ownership we will regret leaving our very good situation for something we are “meh” about, just to lock in a home price. But then I’m worried that me from 20 years from now will be kicking current me if we don’t.
I know there’s no great answer here. This previous question gave me much to think about, and many of the answers were along the lines of “buy now while you can still afford it.” But, ugh. I just don’t want to.
So we bought a multifamily at the very top of the housing bubble in the oughts, but years of dropping rents and my stagnant wage took us into foreclosure. But if we could have managed to hold on, we'd be so goddamn comfortable right now. Goddamn it to hell. Anyway, since then we've been rent-priced out of Boston and my commute is 4 hours a day now, so that's another thing.
posted by turkeybrain at 9:05 AM on May 24, 2018
posted by turkeybrain at 9:05 AM on May 24, 2018
Talk to your landlord about rent-to-own. There's a specific term for it in real estate -- land lease? lend-lease? -- where, if the landlord is amenable, you end up in a situation where your rent is part of a promise to buy at some point down the road. You and your landlord can make that determination between yourselves.
posted by tzikeh at 9:09 AM on May 24, 2018 [4 favorites]
posted by tzikeh at 9:09 AM on May 24, 2018 [4 favorites]
You could be me! We maybe could buy, but it would be a terrible struggle right now. In our mid-sized city, prices in central city neighborhoods are already well above the real estate bubble of 10 years ago, having increased around 80% since the market low. We'd be buying very, very high. We like our rental house and love our neighborhood. We don't really care for the hassle or expense of owning, but the school district is going to cause us trouble with moving even a quarter mile in the wrong direction, which is a real argument against renting. We are fine with moving. It's price that's the biggest issue.
A major consideration for us is the national economy in the US becoming unstable, primarily due to significant Federal government instability. Things like the dotcom bubble bursting, a massive trade war, an oil shock due to war in Iran or a nuclear exchange involving North Korea, seem far more likely now than they've ever been. This means we could be irrecoverably underwater on a mortgage really quickly. For us, buying a house today is a bet on the economy continuing, and I think I'd put those odds around 50/50, at best.
We also like where we live and are paying cheap, steady rent. On the other hand, our landlord is almost certainly going to sell in the next 10 years. It's a conundrum. I don't have any specific advice, but I'll be watching the thread closely.
posted by cnc at 9:27 AM on May 24, 2018 [2 favorites]
A major consideration for us is the national economy in the US becoming unstable, primarily due to significant Federal government instability. Things like the dotcom bubble bursting, a massive trade war, an oil shock due to war in Iran or a nuclear exchange involving North Korea, seem far more likely now than they've ever been. This means we could be irrecoverably underwater on a mortgage really quickly. For us, buying a house today is a bet on the economy continuing, and I think I'd put those odds around 50/50, at best.
We also like where we live and are paying cheap, steady rent. On the other hand, our landlord is almost certainly going to sell in the next 10 years. It's a conundrum. I don't have any specific advice, but I'll be watching the thread closely.
posted by cnc at 9:27 AM on May 24, 2018 [2 favorites]
"We might get priced out" is a reasonable consideration if you're considering whether or not to buy a house you know you can afford. It is not a reason to buy a house you can't. I wish I could show you the files of some of the places I've worked, the thousands of homeowners who destroyed themselves financially by making this decision pre-2007. The Obama administration was not great in helping them, but a Republican administration will do nothing for you. If you can't get a place where your DTI is 30% or under, you're not able to buy. That said, there is no harm and not a ton of cost in looking around to see if you can, as long as you have steeled yourself not to get swept away by bidding fever.
Talk to your landlord about rent-to-own. There's a specific term for it in real estate -- land lease? lend-lease? -- where, if the landlord is amenable, you end up in a situation where your rent is part of a promise to buy at some point down the road. You and your landlord can make that determination between yourselves.
This is almost as bad an idea, at least the way it currently works. This is literally a technique used in the past and now again to strip wealth from non-white communities. It's featured in "The Case for Reparations," even. You build zero equity while making these payments. Miss one payment anywhere along the way, and you could lose everything.
I'm sorry I don't have a positive solution for you. You may be caught in the gears of history. But having to move out of the city, as much as it sucks, is not as bad as having to move out of the city immediately following a foreclosure.
posted by praemunire at 9:38 AM on May 24, 2018 [16 favorites]
Talk to your landlord about rent-to-own. There's a specific term for it in real estate -- land lease? lend-lease? -- where, if the landlord is amenable, you end up in a situation where your rent is part of a promise to buy at some point down the road. You and your landlord can make that determination between yourselves.
This is almost as bad an idea, at least the way it currently works. This is literally a technique used in the past and now again to strip wealth from non-white communities. It's featured in "The Case for Reparations," even. You build zero equity while making these payments. Miss one payment anywhere along the way, and you could lose everything.
I'm sorry I don't have a positive solution for you. You may be caught in the gears of history. But having to move out of the city, as much as it sucks, is not as bad as having to move out of the city immediately following a foreclosure.
posted by praemunire at 9:38 AM on May 24, 2018 [16 favorites]
You can approach your landlord to include the right of first refusal if he decides to sell to your lease. It might not be ideal timing, but it adds a layer of security to you not being forced j to a move. I’ve known a few folks who’ve done this and have bought and passed on the opportunity.
I have also known folks who have done rent-to-own successfully, and the landlords get some bananas tax credits for it in some states. It’s complex and uncommon, but possible.
posted by furnace.heart at 9:42 AM on May 24, 2018 [4 favorites]
I have also known folks who have done rent-to-own successfully, and the landlords get some bananas tax credits for it in some states. It’s complex and uncommon, but possible.
posted by furnace.heart at 9:42 AM on May 24, 2018 [4 favorites]
Until I got to the middle of the question, I was sure you lived in Seattle like me. I'm in a similar situation - I don't adore my rental as much as you do, but I'm in the same position of being just barely able to afford something still, but it's not going to be as good as what I have, and I'm just not super excited about the idea of being a homeowner. For a variety of reasons, I'm also just not ready to buy.
My temporary situation while I figure out if I'm going to stay here long term is to save as much money as I possibly can. I look at it this way: if I do decide to buy in a year or two, having more saved will help offset the higher cost of everything. And if I don't, then having savings helps me feel like I won't be trapped without options if my rent does get too expensive down the line. And the harsh thing is that even if you could scrape together 6% for a down payment, if that's all your savings, you are taking a HUGE risk. Depending on the local housing market, it might be a risk worth taking, but it is a risk. So I'd say, even if you don't decide to buy, still make sure you're saving money. I know, easier said than done!
Also, and this may be a bit of a derail, but living in Seattle, I can't help but get nervous about another bubble bursting. People are doing such crazy things (like the things you describe in your post) to get into houses and it feels like it can't last forever. It's not exactly like the mid-2000s, because there are real demand forces underlying these booms, but I just have a real fear of buying at the exact top of the market. But then I also have anxiety about missing my last chance. So I feel you.
posted by lunasol at 10:11 AM on May 24, 2018 [2 favorites]
My temporary situation while I figure out if I'm going to stay here long term is to save as much money as I possibly can. I look at it this way: if I do decide to buy in a year or two, having more saved will help offset the higher cost of everything. And if I don't, then having savings helps me feel like I won't be trapped without options if my rent does get too expensive down the line. And the harsh thing is that even if you could scrape together 6% for a down payment, if that's all your savings, you are taking a HUGE risk. Depending on the local housing market, it might be a risk worth taking, but it is a risk. So I'd say, even if you don't decide to buy, still make sure you're saving money. I know, easier said than done!
Also, and this may be a bit of a derail, but living in Seattle, I can't help but get nervous about another bubble bursting. People are doing such crazy things (like the things you describe in your post) to get into houses and it feels like it can't last forever. It's not exactly like the mid-2000s, because there are real demand forces underlying these booms, but I just have a real fear of buying at the exact top of the market. But then I also have anxiety about missing my last chance. So I feel you.
posted by lunasol at 10:11 AM on May 24, 2018 [2 favorites]
It's a tough question, because the only real way it can be answered is with a prediction of the future. Nobody can predict the future with any accuracy. Pre-2008, everybody was getting in before getting priced out, and many of those folks got royally fucked. In my area, people are still underwater from that time after making that exact calculation. Sometime 2012-ish or so, people started getting excited about locking in the low mortgage rates before they went up. We're still in a low-interest rate environment, 6 years later.
The rent-vs-buy calculators require you to predict the future (interest rates, inflation, rent increases, return on investments that would otherwise be used toward house purchase). Who, in 2016, would have expected a 21% return on their S&P 500 fund for 2017? Who would've put in the fact that the tax code would change - that SALT would be capped at 10k and the standard deduction doubled (essentially washing out the relative tax benefit of ownership vs renting for most of us)?
I know this isn't a helpful answer. But. I think the best course of action is to make big real estate purchases when your career is settled in, your location is good for a long while, and you've picked out a life partner if you want one. AND when you can afford both the real estate and a kind-of ordinary bad thing happening. For example, after you make the purchase, can you weather a job loss for several months? What if you crash your perfectly functional old car and insurance gave you $500 bucks for it, is this unfair PITA or is it catastrophically bad? These kinds of things.
I would not really advocate for determining your purchase by timing the market. I'd advocate timing your purchase when it's best for your life and you are able to make it happen comfortably in the current market. You might miss out on something. You might also duck a motherfucker of a bullet.
Nobody can predict the future. They just say "6" and then the dice come up "6" and they think they know something.
posted by everythings_interrelated at 10:12 AM on May 24, 2018 [21 favorites]
The rent-vs-buy calculators require you to predict the future (interest rates, inflation, rent increases, return on investments that would otherwise be used toward house purchase). Who, in 2016, would have expected a 21% return on their S&P 500 fund for 2017? Who would've put in the fact that the tax code would change - that SALT would be capped at 10k and the standard deduction doubled (essentially washing out the relative tax benefit of ownership vs renting for most of us)?
I know this isn't a helpful answer. But. I think the best course of action is to make big real estate purchases when your career is settled in, your location is good for a long while, and you've picked out a life partner if you want one. AND when you can afford both the real estate and a kind-of ordinary bad thing happening. For example, after you make the purchase, can you weather a job loss for several months? What if you crash your perfectly functional old car and insurance gave you $500 bucks for it, is this unfair PITA or is it catastrophically bad? These kinds of things.
I would not really advocate for determining your purchase by timing the market. I'd advocate timing your purchase when it's best for your life and you are able to make it happen comfortably in the current market. You might miss out on something. You might also duck a motherfucker of a bullet.
Nobody can predict the future. They just say "6" and then the dice come up "6" and they think they know something.
posted by everythings_interrelated at 10:12 AM on May 24, 2018 [21 favorites]
I am not any kind of financial expert but I personally would 100% not buy in the circumstances you're describing. You don't want to, you can't afford to, and you're in the middle of a bubble that's making you panic.
posted by windykites at 10:37 AM on May 24, 2018 [12 favorites]
posted by windykites at 10:37 AM on May 24, 2018 [12 favorites]
I'm glad I purchased a place when I did. But I'd do the math. If you assume a rent of $1200 or a mortgage of $2000, and average annual stock market returns of X%, and you saving that $800 every month, vs. home price appreciation of $Y, but annual maintenance of $Z... that's the kind of math I'd do. Sometimes you realize that your instincts are very right or completely wrong.
posted by slidell at 10:45 AM on May 24, 2018 [1 favorite]
posted by slidell at 10:45 AM on May 24, 2018 [1 favorite]
As someone who owns a house (that has appreciated even!) I'm still pretty ambivalent about home ownership. First of all, just because your mortgage stays approximately the same (mine's up close to $200 since I purchased 8 years ago) that doesn't mean your 'cost of ownership' is fixed. Homes get old and you have to repair them - and the cost of parts and repairs increases and some years it can be not that much and other years it can be mega-expensive. In fact, I'd guess that my (fixer up, 50 year old) house has cost me close to $500 a month above my mortgage since I bought it and will for the next few more years. Sure, I guess I get that money back if I ever sell, but it'd be nice to have the money now too.
I personally loved renting. If my spouse would go for it, I'd be renting again tomorrow.
Home appreciation is also not 'money,' at best it is a loan. For it to become money, you have to move elsewhere and spend less.
posted by The_Vegetables at 11:06 AM on May 24, 2018 [3 favorites]
I personally loved renting. If my spouse would go for it, I'd be renting again tomorrow.
Home appreciation is also not 'money,' at best it is a loan. For it to become money, you have to move elsewhere and spend less.
posted by The_Vegetables at 11:06 AM on May 24, 2018 [3 favorites]
If I were in your shoes, I'd be very excited to buy. I've wanted to buy a house/condo since I was in my early 20s.
But you are not excited, and in fact you're dreading it. So don't do it. Embrace the decision you're making, and live with it. It's kinda like marriage. It's a good idea for some people, and not a great idea for others. If you're not excited to make the plunge, then it's not a good idea for you.
Just keep saving as much as you can so you have freedom later to move or buy when you're ready.
An alternative to renting is to look at buying a condo if you want the security of ownership, but don't want to deal with maintenance. You'll still be on the hook for the inside of your condo, but you'll pay HOA fees to cover all outside maintenance. This can be a good option for some people. Condos come in all shapes and sizes, too. You don't have to be in a large building if you don't want to be.
posted by hydra77 at 11:15 AM on May 24, 2018 [1 favorite]
But you are not excited, and in fact you're dreading it. So don't do it. Embrace the decision you're making, and live with it. It's kinda like marriage. It's a good idea for some people, and not a great idea for others. If you're not excited to make the plunge, then it's not a good idea for you.
Just keep saving as much as you can so you have freedom later to move or buy when you're ready.
An alternative to renting is to look at buying a condo if you want the security of ownership, but don't want to deal with maintenance. You'll still be on the hook for the inside of your condo, but you'll pay HOA fees to cover all outside maintenance. This can be a good option for some people. Condos come in all shapes and sizes, too. You don't have to be in a large building if you don't want to be.
posted by hydra77 at 11:15 AM on May 24, 2018 [1 favorite]
I have some things in common with you. I, too, live in a rapidly growing metropolitan area, one of the fastest-growing areas in the country. The cost of living is off the charts here. Here's my story.
The husband and I bought in 2006. We had a great rental that we were happy in, but our landlord wanted to move her elderly mother into the place, so we had to leave. We bought in 2006. It was nail-bitingly expensive, and moving is a pain in the butt. The place we purchased was in the same neighborhood that our rental was in, so it didn't impact our commutes much.
As you know, the Great Recession hit in 2008 and we watched our property lose over 250,000 worth of value on the market. However, we were happy living in our place, and all we could do was shrug and say, "well, at least we can live in it." We also took advantage of all of the silver linings that the recession offered: we lowered our tax assessment on our property. We refinanced and locked in a very low interest rate. We made some upgrades to our place. We grew comfortable there.
Fast forward to now. Our place has regained all of its value, and then some. We continue to live here. If we wanted to move in now, we wouldn't be able to afford it.
Here are some key things to think about
1. You can't see the future, but you can make educated guesses. I live in the Bay Area. Over the long term, the Bay Area rebounded from the Great Recession because of the potency of the tech industry. How robust is the job market in your city? Is it a bubble, or is it evergreen?
Is it in a lovely part of the country with nice weather?
2. I know you're happy in your rental, but ask yourself this: do you just that you dread moving, because it would be a pain in the ass?
If I were you, I'd start casually looking around.
posted by cleverevans at 11:40 AM on May 24, 2018 [2 favorites]
The husband and I bought in 2006. We had a great rental that we were happy in, but our landlord wanted to move her elderly mother into the place, so we had to leave. We bought in 2006. It was nail-bitingly expensive, and moving is a pain in the butt. The place we purchased was in the same neighborhood that our rental was in, so it didn't impact our commutes much.
As you know, the Great Recession hit in 2008 and we watched our property lose over 250,000 worth of value on the market. However, we were happy living in our place, and all we could do was shrug and say, "well, at least we can live in it." We also took advantage of all of the silver linings that the recession offered: we lowered our tax assessment on our property. We refinanced and locked in a very low interest rate. We made some upgrades to our place. We grew comfortable there.
Fast forward to now. Our place has regained all of its value, and then some. We continue to live here. If we wanted to move in now, we wouldn't be able to afford it.
Here are some key things to think about
1. You can't see the future, but you can make educated guesses. I live in the Bay Area. Over the long term, the Bay Area rebounded from the Great Recession because of the potency of the tech industry. How robust is the job market in your city? Is it a bubble, or is it evergreen?
Is it in a lovely part of the country with nice weather?
2. I know you're happy in your rental, but ask yourself this: do you just that you dread moving, because it would be a pain in the ass?
If I were you, I'd start casually looking around.
posted by cleverevans at 11:40 AM on May 24, 2018 [2 favorites]
It's a question about risk, and controlling costs.
First off, I would never suggest treating home ownership as an investment. You don't know what the market will do. Make your decision based not on how much money you might make when you sell, but about whether the cost of buying justifies the benefit of ownership.
If you rent, you risk being priced out of your home, which becomes more and more likely the more and more demand there is for rentals in your area. If you own, you risk your taxes going up, you risk having to fix something, you risk your HOA/Condo board doing something astonishingly stupid to make your place unliveable.
If you see yourself staying long term, and it seems like rents are going to go up long term, it makes sense to buy, if you can afford to do so. Buying means you lock in your monthly expense to a relatively fixed value -- your mortgage and your tax payment.
You said you like your apartment -- does that mean a flat? Or like the floor of someone's house? Condo ownership might be worth looking into; as it is a combination of the experience of renting, but the financial aspects of owning. In general there is much less maintenance to do, though you pay a maintenance fee. (If something inside your unit breaks, however, you'll be responsible for it.)
If you can buy a condo that approximates your apartment living experience, in an area you like, at a price you can afford, you may get the best of all worlds. Be sure to research the condo corporation. Some of them are pretty shitty, and don't take care of the buildings very well.
We're sot of in your position. We sold our house to move to the big city. We rented an apartment, knowing rents were going to go up. Then, we bought a condo in a respected building in the part of town we wanted to live in. Given our down payment, it will be a little more money per month than renting until the mortgage is paid off, then afterwards it will be much, much less.
We're in our 50s. Controlling our long-term expenses is important. We bought because by doing so, we can control our long-term expenses. We bought a condo because we're tired of taking care of a house.
Hope this helps.
posted by seanmpuckett at 12:20 PM on May 24, 2018 [1 favorite]
First off, I would never suggest treating home ownership as an investment. You don't know what the market will do. Make your decision based not on how much money you might make when you sell, but about whether the cost of buying justifies the benefit of ownership.
If you rent, you risk being priced out of your home, which becomes more and more likely the more and more demand there is for rentals in your area. If you own, you risk your taxes going up, you risk having to fix something, you risk your HOA/Condo board doing something astonishingly stupid to make your place unliveable.
If you see yourself staying long term, and it seems like rents are going to go up long term, it makes sense to buy, if you can afford to do so. Buying means you lock in your monthly expense to a relatively fixed value -- your mortgage and your tax payment.
You said you like your apartment -- does that mean a flat? Or like the floor of someone's house? Condo ownership might be worth looking into; as it is a combination of the experience of renting, but the financial aspects of owning. In general there is much less maintenance to do, though you pay a maintenance fee. (If something inside your unit breaks, however, you'll be responsible for it.)
If you can buy a condo that approximates your apartment living experience, in an area you like, at a price you can afford, you may get the best of all worlds. Be sure to research the condo corporation. Some of them are pretty shitty, and don't take care of the buildings very well.
We're sot of in your position. We sold our house to move to the big city. We rented an apartment, knowing rents were going to go up. Then, we bought a condo in a respected building in the part of town we wanted to live in. Given our down payment, it will be a little more money per month than renting until the mortgage is paid off, then afterwards it will be much, much less.
We're in our 50s. Controlling our long-term expenses is important. We bought because by doing so, we can control our long-term expenses. We bought a condo because we're tired of taking care of a house.
Hope this helps.
posted by seanmpuckett at 12:20 PM on May 24, 2018 [1 favorite]
Yes, if your home value drops and you don't need to move, that is simply a paper loss and can be waited out. The problem is that drops in housing value and general economic recession tend to correlate. If you lose your job at the same time the market bottoms out, you have a problem: you can't service the mortgage and you can't pay it off by selling. Depending on the state, you're probably safer as a public employee than a private-sector one from this fate, but there certainly are no guarantees. Obviously, the more affordable the payment relative to your salary, the more likely you will be able to find a new job that allows you to make the payments/manage otherwise.
posted by praemunire at 12:34 PM on May 24, 2018
posted by praemunire at 12:34 PM on May 24, 2018
Re: Land Contracts:
me: Talk to your landlord about rent-to-own. There's a specific term for it in real estate -- land lease? lend-lease? -- where, if the landlord is amenable, you end up in a situation where your rent is part of a promise to buy at some point down the road. You and your landlord can make that determination between yourselves.
praemunire: This is almost as bad an idea, at least the way it currently works. This is literally a technique used in the past and now again to strip wealth from non-white communities. It's featured in "The Case for Reparations," even. You build zero equity while making these payments. Miss one payment anywhere along the way, and you could lose everything.
Found mine -- it's a "Land Contract," and it is 100% untrue that you build zero equity while making payments on a Land Contract. Ask me how I know. It is literally a property in your name. As for taking advantage of the person who entered the contract in order to buy in the future -- sure, it would be easy for the "landlord" to take advantage of that person, but it's easy for anyone in a position of power to take advantage of people who enter into financial agreements with them. That's why you have a lawyer check the contract, so that can't happen.
posted by tzikeh at 12:47 PM on May 24, 2018 [1 favorite]
me: Talk to your landlord about rent-to-own. There's a specific term for it in real estate -- land lease? lend-lease? -- where, if the landlord is amenable, you end up in a situation where your rent is part of a promise to buy at some point down the road. You and your landlord can make that determination between yourselves.
praemunire: This is almost as bad an idea, at least the way it currently works. This is literally a technique used in the past and now again to strip wealth from non-white communities. It's featured in "The Case for Reparations," even. You build zero equity while making these payments. Miss one payment anywhere along the way, and you could lose everything.
Found mine -- it's a "Land Contract," and it is 100% untrue that you build zero equity while making payments on a Land Contract. Ask me how I know. It is literally a property in your name. As for taking advantage of the person who entered the contract in order to buy in the future -- sure, it would be easy for the "landlord" to take advantage of that person, but it's easy for anyone in a position of power to take advantage of people who enter into financial agreements with them. That's why you have a lawyer check the contract, so that can't happen.
posted by tzikeh at 12:47 PM on May 24, 2018 [1 favorite]
You could maybe find a way to limit your risks without moving yourselves right now by buying a place that you rent to someone else. Ideally, you could buy something that you'd consider living in eventually. But even if not, if the rent tracks with rents in the region, then around the time that you were getting priced out of the rental market, you'd be bringing in more income from your own rental. And if the price tracks with the real estate market locally, you'll have more equity to help you cover an eventual purchase. If you like the idea generally, you could do the math taking into account tax on the rents and the transaction costs of buying and selling. Might even be worth talking to a CPA (if you do, ask about depreciation recapture). Also, heads up that you need to put more money down for rental purchases.
posted by slidell at 12:56 PM on May 24, 2018
posted by slidell at 12:56 PM on May 24, 2018
When you make your financial calculations please keep in mind that your landlord could raise your rent at any time. If you have a month-to-month lease (common after a long term rental) you could literally have a one month notice to move. Your landlord could need to pass on tax increases, as cities scrutinize assessments in cities like mine, which is growing its center city area. Renters are generally losers in gentrifying areas, as landlords are forced to increase rent to cover increased costs. Landlords won't continue to rent if they are losing money.
Landlords sometimes have setbacks of their own, and need to sell rental properties. New owners are only obligated to fulfill a current lease, and a new owner will likely charge market rent for any new lease term. Sometimes owners need to take over properties for ageing or ill family members. And sometimes landlords die, forcing the sale of their rental properties to settle their estate.
I understand that you don't want to leave your comfortable and affordable apartment, but please prepare financially for a future that you can't totally control. To take charge of your housing options in the future, you should save as much as you possibly can. None of these catastrophes will definitely occur, but if they do, you will be much better prepared and have far more options.
posted by citygirl at 1:58 PM on May 24, 2018
Landlords sometimes have setbacks of their own, and need to sell rental properties. New owners are only obligated to fulfill a current lease, and a new owner will likely charge market rent for any new lease term. Sometimes owners need to take over properties for ageing or ill family members. And sometimes landlords die, forcing the sale of their rental properties to settle their estate.
I understand that you don't want to leave your comfortable and affordable apartment, but please prepare financially for a future that you can't totally control. To take charge of your housing options in the future, you should save as much as you possibly can. None of these catastrophes will definitely occur, but if they do, you will be much better prepared and have far more options.
posted by citygirl at 1:58 PM on May 24, 2018
If you do seriously think of buying and you're in the US look into FHA loans, they're federally subsidized and require only 3.5% down. They insist on a very thorough inspection and won't let you buy anything substandard. I would check into that and conventional mortgages before approaching the landlord about buying the house you're in. Find out how much you can realistically borrow for a house.
posted by mareli at 2:31 PM on May 24, 2018 [2 favorites]
posted by mareli at 2:31 PM on May 24, 2018 [2 favorites]
Look, I don't have your contract in front of me, and precisely because these contracts aren't as well-regulated by the state, they can vary individually, but in many states, in a contract-for-deed the seller retains legal title to the property. Further, here is what, e.g., Wikipedia says: "if the buyer defaults on installment payments, the land contract may consider the failure to timely pay installments a breach of contract and the land equity may revert to the seller, depending on the land contract provisions." If your contract contains such a provision, then, no, you are not really building equity in the sense a traditional mortgagor is because you can lose the entire sum you've paid if you default on payments.
Coates didn't make this up:
As for taking advantage of the person who entered the contract in order to buy in the future -- sure, it would be easy for the "landlord" to take advantage of that person, but it's easy for anyone in a position of power to take advantage of people who enter into financial agreements with them.
Mortgages have a panoply of state and federal regulations that are supposed to protect the borrower. Even then, there are a lot of sharp practices. These loans seek to evade many of these protections, very often because the borrower's credit is so poor or the loan so unaffordable that traditional financing is unavailable. This is an open invitation to exploitation. It's a lot harder for people to take advantage of you if you don't deliberately choose to forgo the legal protections available to you because you want to take a risk the law thinks is too high. I sincerely hope your contract doesn't contain one, and that you do not misunderstand whether you actually hold title to the property or not, but, either way, a person buying in this manner from a private landlord (some nonprofits use it in a slightly different way and without the predatory terms, but OP does not appear to be renting from a nonprofit) is exposing themselves to a lot of risk. I wouldn't recommend it to anyone who isn't well enough off to hire sophisticated counsel and withstand the loss of principal.
posted by praemunire at 2:45 PM on May 24, 2018 [3 favorites]
Coates didn't make this up:
Three months after Clyde Ross moved into his house, the boiler blew out. This would normally be a homeowner’s responsibility, but in fact, Ross was not really a homeowner. His payments were made to the seller, not the bank. And Ross had not signed a normal mortgage. He’d bought “on contract”: a predatory agreement that combined all the responsibilities of homeownership with all the disadvantages of renting—while offering the benefits of neither. Ross had bought his house for $27,500. The seller, not the previous homeowner but a new kind of middleman, had bought it for only $12,000 six months before selling it to Ross. In a contract sale, the seller kept the deed until the contract was paid in full—and, unlike with a normal mortgage, Ross would acquire no equity in the meantime. If he missed a single payment, he would immediately forfeit his $1,000 down payment, all his monthly payments, and the property itself.Here's what the Minnesota Fed has to say in the present day:
The men who peddled contracts in North Lawndale would sell homes at inflated prices and then evict families who could not pay—taking their down payment and their monthly installments as profit. Then they’d bring in another black family, rinse, and repeat. “He loads them up with payments they can’t meet,” an office secretary told The Chicago Daily News of her boss, the speculator Lou Fushanis, in 1963. “Then he takes the property away from them. He’s sold some of the buildings three or four times.”
A contract for deed, also known as a "bond for deed," "land contract," or "installment land contract," is a transaction in which the seller finances the sale of his or her own property. In a contract for deed sale, the buyer agrees to pay the purchase price of the property in monthly installments. The buyer immediately takes possession of the property, often paying little or nothing down, while the seller retains the legal title to the property until the contract is fulfilled. The buyer has the right of occupancy and, in states like Minnesota, the right to claim a homestead property tax exemption. The buyer finances the purchase with assistance from the seller, who retains a security in the property.From the NY Times in 2016 ("Market for Fixer-Uppers Traps Low-Income Buyers"):
The contract for deed is a much faster and less costly transaction to execute than a traditional, purchase-money mortgage. In a typical contract for deed, there are no origination fees, formal applications, or high closing and settlement costs. Another important feature of a contract for deed is that seizure of the property in the event of a default is generally faster and less expensive than seizure in the case of a traditional mortgage. If the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the property, and keep previous installments paid by the buyer as liquidated damages. Under these circumstances, the seller can reclaim the property without a foreclosure sale or judicial action.
Dozens of these houses were scooped up after the financial crisis by investors, who then make deals with low-income home buyers unable to get traditional mortgages. The arrangement is something like buying a home on an installment plan, with a high-interest, long-term loan called a contract for deed, or land contract.(The CFPB is reported to have started an investigation of some of these lenders after the article was published.)
But for buyers lured by the dream of homeownership, these seller-financed transactions can become a money trap that ends with a quick eviction by the seller, who can flip the home again. Before the housing crisis, low-income buyers got too much of a house that they couldn’t afford. Now, they are getting too little of a house that they can’t afford to repair.
[...]
Provisions in a contract for deed are enforceable as long as they do not conflict with state law. The home dweller has more limited protections than a person buying a house with a mortgage, and evictions are quicker than a foreclosure. The residents are typically responsible for repairs and paying all property taxes, but the legal title under a contract for deed does not transfer until the final payment is made — an end result that rarely happens.
As for taking advantage of the person who entered the contract in order to buy in the future -- sure, it would be easy for the "landlord" to take advantage of that person, but it's easy for anyone in a position of power to take advantage of people who enter into financial agreements with them.
Mortgages have a panoply of state and federal regulations that are supposed to protect the borrower. Even then, there are a lot of sharp practices. These loans seek to evade many of these protections, very often because the borrower's credit is so poor or the loan so unaffordable that traditional financing is unavailable. This is an open invitation to exploitation. It's a lot harder for people to take advantage of you if you don't deliberately choose to forgo the legal protections available to you because you want to take a risk the law thinks is too high. I sincerely hope your contract doesn't contain one, and that you do not misunderstand whether you actually hold title to the property or not, but, either way, a person buying in this manner from a private landlord (some nonprofits use it in a slightly different way and without the predatory terms, but OP does not appear to be renting from a nonprofit) is exposing themselves to a lot of risk. I wouldn't recommend it to anyone who isn't well enough off to hire sophisticated counsel and withstand the loss of principal.
posted by praemunire at 2:45 PM on May 24, 2018 [3 favorites]
Buy a house. Put tenants in it. Stay where you are. If rents and house prices go up, your asset appreciates, and you can think about it as your tenants paying your rent, while you pay off the mortgage. Watch out for mortgage rate increases though.
posted by GeeEmm at 2:54 PM on May 24, 2018 [2 favorites]
posted by GeeEmm at 2:54 PM on May 24, 2018 [2 favorites]
Your city and/or county may offer first-time home buyer programs which you'd qualify for now, with matching grants, lower interest rates, and the like. If you're sure you're staying in town you should check them out, in case income caps bar your eligibility in a few years' time.
posted by Iris Gambol at 3:04 PM on May 24, 2018
posted by Iris Gambol at 3:04 PM on May 24, 2018
FHA loans and first-time buyer loans are all for people who intend to make the house their primary residence. Getting a loan to buy a rental is a whole different kind of mortgage. If duplexes are a thing where you are you might consider one of those, and you can get the abovementioned mortgages for them as long as you live in one unit.
posted by mareli at 4:13 PM on May 24, 2018 [1 favorite]
posted by mareli at 4:13 PM on May 24, 2018 [1 favorite]
My wife and I have been in basically the same situation as you for 17 years now; FWIW, by the time we had a few nickles to rub together we were already pretty much priced out of the home ownership market* in Toronto, and prices have, like, doubled since then. We're in a great situation as long as the landlord (who is a fantastic guy, and who has barely raised the rent at all in, I repeat, 17 years) doesn't decide to sell the place or otherwise compel us to move, but if and when that happens our decision to wait and forgo home ownership almost certainly means we're going to have to make some sacrifices in terms of the size of our apartment and/or its location, and will definitely be paying significantly more in rent despite those sacrifices.
* I mean, we *could* have afforded a down payment and a mortgage, but only by the skin of our teeth and if nothing ever went wrong and we never needed to make any major repairs or renovations or wanted to eat at a restaurant or travel farther than 20 kilometres ever again.
posted by The Card Cheat at 4:54 PM on May 24, 2018
* I mean, we *could* have afforded a down payment and a mortgage, but only by the skin of our teeth and if nothing ever went wrong and we never needed to make any major repairs or renovations or wanted to eat at a restaurant or travel farther than 20 kilometres ever again.
posted by The Card Cheat at 4:54 PM on May 24, 2018
Buy if you're able, coulda, shoulds, for various rational and stupid reasons did not, would've been a millionaire.
posted by sammyo at 5:08 PM on May 24, 2018
posted by sammyo at 5:08 PM on May 24, 2018
I manage a couple of rentals and caution that even in a good rental market, being a landlord can be time consuming, stressful, and less lucrative than one might hope. Really, if you aren’t sure you are up for being a homeowner, I’d urge caution before becoming a landlord.
posted by ElizaMain at 3:36 AM on May 25, 2018 [1 favorite]
posted by ElizaMain at 3:36 AM on May 25, 2018 [1 favorite]
I lived in Seattle from 1980 to 2000, and never quite had the money to buy. My friends who did are still there. The ones who didn't have mostly moved away. Your mileage may vary.
posted by baseballpajamas at 6:00 AM on May 25, 2018
posted by baseballpajamas at 6:00 AM on May 25, 2018
I'm a little confused by the people suggesting buying a rental property: If cat friend is barely able to scrape together a small down payment for their primary residence, how are they supposed to manage their rent plus their new mortgage on a rental plus rental upkeep/taxes?
Especially given that they are unlikely to be able to afford a particularly up-scale rental property, so their rental income will probably offer pretty thin margins AND have increased maintenance costs. The mortgage on the rental property would not be FHA or FTHB loans since those aren't available for rental property and will likely carry a higher interest rate than the rate they would get on a primary residence mortgage. Plus, now they have to get good renters that pay reliably and manage to have no vacancies.
Since cat friend likes their current house, I'd think about talking to the landlord about a purchase or at least a right of first refusal. Make saving a priority and keep a low-key eye out for property. You have time to find a good fit - either the current house or another situation. Like some others have said, condo ownership may be right for you given your preference for low maintenance.
posted by yggdrasil at 6:06 AM on May 25, 2018 [4 favorites]
Especially given that they are unlikely to be able to afford a particularly up-scale rental property, so their rental income will probably offer pretty thin margins AND have increased maintenance costs. The mortgage on the rental property would not be FHA or FTHB loans since those aren't available for rental property and will likely carry a higher interest rate than the rate they would get on a primary residence mortgage. Plus, now they have to get good renters that pay reliably and manage to have no vacancies.
Since cat friend likes their current house, I'd think about talking to the landlord about a purchase or at least a right of first refusal. Make saving a priority and keep a low-key eye out for property. You have time to find a good fit - either the current house or another situation. Like some others have said, condo ownership may be right for you given your preference for low maintenance.
posted by yggdrasil at 6:06 AM on May 25, 2018 [4 favorites]
Best answer: We bought in Toronto as early as we could and that has paid off for us. That said here is my advice:
- unless your city is about to go insane, in which case you probably can't buffer that well for it anyway, a year is not going to break you completely. I advise taking a year and living on a very strict austerity budget (we literally spent a year eating rice and beans, researching the dish in like every culture that has rice. and beans. and okay potatoes. zero eating out, zero travel, etc.) to a) save up for a down payment and b) get a sense of what it's like if you buy a home that's borderline unaffordable. It will give you a lot of clarity as well as a pile of cash at the end of it which you can use for any purpose. It will also let you know how you will do as house owners in an unaffordable market, because that's how many people end up living to pay their mortgages.
- once you have a pile of cash your options open up in many ways, including investing that cash right now in order to fund future rent increases. Bear in mind that your problem is actually at base economic but not real estate. So my husband and I bought a fixxer-upper and turned that into equity, and then we traded up slightly and we are a couple of years away from being mortgage-free in a Toronto-area home...but that was all our weekends, vacations, and cash for 7 years. If I had invested that time into a side gig or even my career it's possible I would have out-earned the gains in the market. I might also have watched too much TV. Who knows. But still; it's not just rent vs. buy.
- once you have a better down payment I feel like you will have developed more clarity about what a house budget might look like, etc. and then you can either wait for a dip in the market and pounce (we got our current home at a great price because a) we bought not in spring and b) the deal on it with the first buyer fell through and we had no contingency on financing) or wait to find a place you really do love even if it's smaller/further out/etc. etc. - if that is what you have decided.
posted by warriorqueen at 7:37 AM on May 25, 2018 [4 favorites]
- unless your city is about to go insane, in which case you probably can't buffer that well for it anyway, a year is not going to break you completely. I advise taking a year and living on a very strict austerity budget (we literally spent a year eating rice and beans, researching the dish in like every culture that has rice. and beans. and okay potatoes. zero eating out, zero travel, etc.) to a) save up for a down payment and b) get a sense of what it's like if you buy a home that's borderline unaffordable. It will give you a lot of clarity as well as a pile of cash at the end of it which you can use for any purpose. It will also let you know how you will do as house owners in an unaffordable market, because that's how many people end up living to pay their mortgages.
- once you have a pile of cash your options open up in many ways, including investing that cash right now in order to fund future rent increases. Bear in mind that your problem is actually at base economic but not real estate. So my husband and I bought a fixxer-upper and turned that into equity, and then we traded up slightly and we are a couple of years away from being mortgage-free in a Toronto-area home...but that was all our weekends, vacations, and cash for 7 years. If I had invested that time into a side gig or even my career it's possible I would have out-earned the gains in the market. I might also have watched too much TV. Who knows. But still; it's not just rent vs. buy.
- once you have a better down payment I feel like you will have developed more clarity about what a house budget might look like, etc. and then you can either wait for a dip in the market and pounce (we got our current home at a great price because a) we bought not in spring and b) the deal on it with the first buyer fell through and we had no contingency on financing) or wait to find a place you really do love even if it's smaller/further out/etc. etc. - if that is what you have decided.
posted by warriorqueen at 7:37 AM on May 25, 2018 [4 favorites]
Response by poster: Thanks for your answers, everyone. I've been doing a lot of soul-searching based on these responses.
posted by cat friend at 6:22 AM on May 26, 2018 [2 favorites]
posted by cat friend at 6:22 AM on May 26, 2018 [2 favorites]
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However, you have identified all the downsides. You will need that downpayment and then some. You will need to be able to afford upkeep and insurance. You don't have to do home maintenance yourself, but then you'll need to pay someone more than you really want to fix stuff for you. I'm not going to say home ownership is amazing, (although I definitely enjoy the sense of not being beholden to someone else's whims), but if you want to not be subject to rising rents, it's that or move somewhere cheaper.
Last note: deals really do happen, even in crazy places. Some landlords want reliable tenants more than more rent. Sometimes they want out of the market and are willing to sell to the current tenants (ie you) and every once in a while at a discounted rate, since they don't have to do any work to do the sale. The real advice is: don't freak out, keep a level head, and do the math to see what you can afford. Good luck!
posted by Phredward at 9:03 AM on May 24, 2018 [4 favorites]