Wednesday, February 01, 2006

Rent or Buy

It's an age old debate, one that DD, SL and I have had more than a few it better to rent or buy? Free Money Finance has a post entitled "Why It's Smarter to Buy than Rent" about the MSN Money article of the same name. They bring up some good points on each side, but in the end, I think that they both agree that it is better in the long run to buy a house. Jim from Blueprint for Financial Prosperity has a post that shows that homeowners are happier than renters. The title of the article seems to say it all, but let's look at the situations of the Young Professionals and see if that is always the best choice.

I moved to the area 8 years ago. There was a little sticker shock even back then since I'm from an area that has much much lower cost of living. Everyone after college talks about having a job for a few years and moving on so I wasn't sure how long I'd be at the company and decided to rent. I got a place for $600 including heat/hot water which was fairly comparable to the prices in the area. Back then a raised ranch went for $150K-$200K. Since that time I've watched prices go up in the area while my rent has stayed the same until recently when it was upped to $700. A raised ranch now costs around $300K while renting a 1 bedroom is going to be $900 and up. I've often had to reevaluate if I should buy a house and have typically come to the same conclusions. Even though the past shows me owning a home would of been great financially, I cannot realistically expect a doubling of housing prices every 7 years. Do I regret not getting in years ago? Well, yeah, if I knew that the appreciation would of done what it did, who wouldn't want that kind of gain? I am however content with renting though for the following reasons.
1) Home ownership costs time. Some can say they could hire a maid and lawnmower, but I always see people have less time after getting a house. They often talk about projects they need to get done or some things that have to get taken care of. I didn't want that and am willing to pay money for additional free time.
2) Home ownership does not neccessarily decrease expenses. I often hear how I'm just throwing thousands of dollars out every year. This however is also what people are doing here with the high property and school taxes too though not to mention other maitenance costs. You can say these are deductable but that just means it's 33% less than the actual tax. So I suppose one could then argue for a condo. Course then I look at the mortgage payment + commons fee difference to renting and see how much money I'm gaining each year to invest by renting.
3) I simply like not having any bills hanging over my head. I may not be having debt work for me, but I'm also not worrying about money. I am socking away money and investing in various things. Even tho I started investing in stocks before the .com bust, my investments have been doing fairly well. Maybe not 200% but a good double digit nonetheless.

Let me start out by saying that we are living in the Northeast and the housing market here is a little bit crazy and way overpriced. My wife and I bought our first house in 2001 for ~$185,000, which at the time felt like enough for us to buy a small state such as Rhode Island. Looking back, we now know that we got a steal...we sold it just 2 years later for ~$285,000. We then built a larger house in a better neighborhood for ~$400,000 that we are living in now. Readers from "normal" states probably think that is ridiculous, and it is, but this is a pretty regular 4 bedroom colonial that would probably be $300,000 in many other places. So far so good, but one of the big problems around here is the taxes. Taxes at our old house were ~$4,500, which seemed really high to us already, but they are ~$11,00 in the new house. WOW!!! I also then have to take into consideration heat, water, electric, cable, and garbage removal. These all add up quickly, especially because a lot of that is included in rent for an apartment.

I also living in an apartment, but with a roomate. I pay around $550 for my rent where hot water is included but electricity is not. The location of my apartment is literally one mile from my apartment door to my office door, so the commute is convenient as well.
There are a few reasons why I have not purchased a house: 1) I'm not sure how long I will be in the area, 2) I'm using the money I'm saving from NOT buying a house and investing into something that will give me a return comparable to as if I had bought a house, and 3) since housing in the area is so expensive - I cannot find a house where the mortgage I would pay similar to what I pay now. Although building equity is an attractive and great financial investment, for my situation here and now, renting for a low cost is the best option for me.

There you have our situations. I think that most people agree that it would be great to be able to buy a house and not have to rent, but does that seem fesible in this area? I don't think that it is for a young single person, renting is pretty much the only option. The only reason that I was able to afford a house around here is because of my wife and our dual incomes.

UPDATE (2/3/2006): I just read an article on Wealth Junkie entitled "Is Now a Better Time To Rent Than Buy" that has a formula to help see which is better to do. A quick look seems to point to it being better to rent around here right now.


Anonymous bjk said...

Knowing the three of you personally (and each of your respective situations), I think all 3 of you are making the correct moves. That $11k in taxes is a little scary RS, but like DD says.. think of it as $7.2k (66% of $11k).. =)

I think buying a house is a good idea for me, but I understand that's it's not for everyone. I love working on my house and I love the idea that I own it (or maybe a % of it). I like that I can paint/build/rip apart/change things here to my own liking. I also happened to get in when the housing market still had room to balloon.

In the financial articles/shows I've experienced, they always explain the benefits and drawbacks to certain investment ideas.. but sometimes it doesn't always come down to a $ figure lost/gained. For example, I know I'm suppossed to sit on my low interest rate school loans for the next 15 years until they are paid off - but a part of me knows that I really REALLY just want to get them paid off sooner. I know it's not the best ~financial~ move, but I just want to feel free and get rid of that one extra monthly payment sooner than later. Sometimes your mental sanity and 'feelings' should count more than $..

2/02/2006 10:36 PM  

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