Thursday, March 20, 2008

Renting VS Buying

I have had a hard time dealing with selling our home. I felt a real sense of accomplishment when we bought it. 2000 sq feet, 1.5 acres in a cul-de-sac, 400sq ft master bed with full bathroom, 4 bedrooms, wood blinds, double garage, jenn air stove, wood burning stove, french doors, custom OAK kitchen. The list goes on. Great house. And now b/c of the economy we have to sell it, we just can't afford it anymore and it breaks my heart. I fought tooth and nail not to leave, and we really really tried to keep it. But unfortunately we just can't keep up with the mortgage...not with a 6 person family on one income. Granted, mh hubby has a great paying job, but during the winter the miles really slow down and the pay just isn't that much. So we decided to sell, and lucky us, we had a buyer ONE WEEK after it was on the market.

Then began the process of finding a home to rent. The place we are currently in was the first home I looked at. It is not as big as our old house, and it is not as nice compared to our "palace". It is a mobile home that needs some cosmetic work on the outside. But it is $800 cheaper a month than our mortgage payment.
These are the benefits it has, compared to our old home:
*HUGE round jacuzzi tub in the master bath, two sinks in master bath
*Dishwasher
*It stays warmer than the other house
*Entrance ways are not carpet, yaay!!!
*Full enclosed fenced yard with privacy fencing
*Not part of the house, but kids take the bus to and from school, so no more driving!
*Vaulted ceilings
*Brand new deck and back porch
*Well water, so that saves $50 a month for water bills
*Allows us to save money, rather than pay someone's salary at the mortgage company

So yes, renting for us now is better. We can save up money and in a few years buy again when we have substantial downpayment. I researched some links on buying and selling and this is what I found:

Rent rather than own. This will probably spark a huge debate, as it always does. The thing is, just don’t assume that buying is the better investment. If you calculate the interest you pay on a mortgage, the cost of insurance and maintenance, buying is often much more costly than renting … and if you rent, save money, and then invest the difference, you can actually end up well ahead in the long run. Now, it’s not a given, so do a comparison, factoring in all expenses.
This is a guest-post from Tim Ellis, author of Seattle Bubble, a blog and forum dedicated to discussing real estate market conditions in the Seattle area.
“If you rent, you’re throwing away your money.”“Owning your own home is a forced savings plan.”“Home ownership is an excellent path to build wealth.”
You’ve probably heard statements like these plenty of times. On television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It’s common knowledge that buying a home is a better financial move than renting. After all, you’re building equity instead of throwing away your money, right? Well, maybe not quite… Rather than assuming the “common knowledge” on this subject is accurate, let’s take a look for ourselves at some of the financial differences between renting and home-buying.
A Real-World ExampleFor the purpose of comparing renting to owning in this article, I’ll be using real-world data gathered from my area (northeast of Seattle). Although most first-time buyers tend to move from renting an apartment to buying a larger, stand-alone house, as much as I can I will compare apples to apples.
For rent, I located a 3-bed, 2.5-bath, 1,840 sqft house with an attached 2-car garage, on 0.2 acres. Monthly price: $1,495.
For purchase I found a 3-bed, 2.5-bath, 1,850 sqft house with an attached 2-car garage, on 0.22 acres. Price: $424,950.
The two homes are located within two miles of each other in similar neighborhoods, and neither is located on a busy road. We’ll assume that our hypothetical homebuyer is a married couple with $85,000 in the bank to make a 20% down payment. To calculate mortgage payments we will use a recent 30-year fixed interest rate of 6.25%.
Let’s look at how the monthly costs break down (approximately) for our hypothetical potential first-time homebuyer:

Renting
Buying
Rent/ Mortgage:

$1,495
$2,093
Insurance:
$20 $163

Property Tax:
-
0 $407
Tax Savings*:
-
($327)
Maintenance:
-
0 $357
Total:
$1,515 $2690

*: (less standard deduction)
Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That’s not exactly chump change. With even a slight upgrade from renting to buying (which most first-time buyers are prone to do), you can easily see how the total monthly costs would be more than double.
“If you rent, you’re throwing away your money.”Common knowledge says that despite today’s large premium, buying a home is a “good investment”. Hey, at least you’re not “throwing away” your money, right? True, the renter in our scenario spends $1,515 every month that they will never see again. I wouldn’t exactly say it has been “thrown away” any more than money spent on any other good or service is “thrown away,” but granted, there is zero financial return on that money.
However, when you take a look at the breakdown of the homebuyer’s monthly expenses, a large amount is money that will never return, either. Insurance, property tax (less tax savings), and maintenance, add up to $517 every month that is being “thrown away.” Even worse is the amount spent on mortgage interest. Consider how much of a mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:
Years
% toward interest
0-5
~80%
6-10
~70%
11-15
~60%
16-20
~50%
21-25
~35%
26-30
~10%
In the first five years, approximately 80% of the mortgage payment goes toward interest. That’s an additional $1,674, for a total of $2,191 being “thrown away” every single month by the homebuyer for the first five years. Ouch! In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.
“Owning your own home is a forced savings plan.”As you can see above, if home buying is like a savings plan, it’s probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have “saved” mind you, but on the total sale price of the home)? Of course not. That doesn’t sound anything like a savings plan.
If our potential homebuyer has that $85,000 saved up for a down payment and deposits it along with just half of the monthly savings over buying ($578 per month) into an account at 8% interest, the balance will be nearly $300,000 in just 10 years. That’s a liquid investment, that can be used for whatever you want, no relocation required. Buying a home is not a savings plan. Actually saving money every month is a savings plan.
“Home ownership is an excellent path to build wealth.”If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home. While both stocks and housing are cyclical markets, long-term historic trends show that housing appreciates at a rate barely above inflation, while stocks tend to return an inflation-adjusted 7-10%. In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.
An important thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is still in the early stages. Four percent is most likely overly optimistic for most areas in the next 5-10 years. The only thing we know for sure is that double-digit gains are gone and won’t be coming back any time soon.
Also keep in mind — I mentioned it above but it bears repeating — in order to cash in on any “wealth” you build through your home you will need to sell that home and move. No, “extracting equity” does not count, since that simply results in a larger debt. Debt is not equal to Wealth.
ConclusionFor most people buying a home will result in their largest monthly bill (by far), and because they believe that it will bring them wealth or that they are “throwing away their money” if they rent, they often take on a much larger home debt than a prudent budget would allow. It is a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits. Of course, everyone’s circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying.

So, we can admit that we did make a mistake buying our home, we got in over our heads. And now we are taking a step back, to "recover" and get oursevles in a better situation financially.

And something else...the man asked me yesterday what I would like for my birthday. I told him a sewing machine. I really want to learn how to make the girls some cute dresses, and buying custom stuff on eBay, is to damn expensive!!! So let's hope that the sewing machine doesn't turn into another dust magnet. I really do want to learn though, some stuff is so cute.

here is another link that just cracked me up

http://www.thedigeratilife.com/blog/index.php/2007/01/17/seriously-thrifty-22-outrageous-ways-to-save-part-2/

2 comments:

Rina Larina said...

Fantastic post.

I've always been torn over what is truly better; renting vs buying.

I do want to own a house one day but I want it to be on OUR terms, and not a situation where we are mortgage poor. This is why I am (sigh) ok with staying where we are at, paying quite cheap rent, until we can afford to get a house in an affordable situation.

KrustyTheCat said...

Well, if you see what he wrote, houses on the coast are super expensive. That is why Barry and I are considering moving out of state. A house in Indiana, the size of the one we just sold, or bigger, and with more land, can cost maybe 150K. We are just going to stay put where we are until we think we can manage a home. I don't think we can safely do it along the whole I-5 corridor though, homes here are outrageously expensive.