patrick.net

Also add in falling prices. This makes a huge dent in the buying side.

Yes--there are a few things.

If you only plan on being there for 7 years, you should take out a 7 yr ARM which is currently running ~2.875%. You shouldn't really include P in your calculation at all. It's not a true cost since you are paying yourself. And you didn't account for any tax savings. Even if you have no other deductions, your interest and property taxes will allow you to itemize and save some money.

On the other side- Crazy is right about the other costs you missed.

Call it Crazy says

Oh No... don't fall for that realtor trick... Once again, a calculator will prove that statement wrong!!

I didn't mean that he would save $$ overall, just that he would save some money on taxes by itemizing.

Troll Hunter says

This is one of the biggest realtor lies going.

Really, your next paragraph proves just the opposite.

Troll Hunter says

So if you pay $13k in interest and taxes, then entire "benefit" of paying an inflated price for a house is worth $420 for an entire year.

Last I checked, $420 counts. And it should be included in any buy vs. rent decision.

If you don't expect an appreciation by the time you are ready to sell(which will most likely be the case) then DO NOT buy. Just 10K red equity in aa year means a lot more over the 30 years of mortgage. :)

Thanks for the quick comments!

Couple of things :

I do not believe the house in the area I want to buy would appreciate at all. I expect it to depreciate at the rate of inflation every year for the next 7 years. Keeping the price the same number when I try to sell.

I was hoping tax savings would offset closing and selling costs. I will need to work the numbers on this though.

I did miss out on the opportunity cost of the down payment. $50,000 x lets say.. %3 for 7 years = roughly $11,500. Wow.

The statistics & assumptions used by Floridabill don't seem to be correct. In SM Co. my home Ins = $55/mo not $100. Flood Ins.=0 (don't buy in a flood plain). His maintenance & other costs also seem very high. Over a 26yr period mine are $200mo. That includes 2 new roofs. Get your ass off the couch & your face off Facebook & do some or most of the work yourself! Most people can learn to paint & do basic plumbing & other repair jobs. I look at homeownership as stablizing some living costs. Renting is only stable for the lease period, after which you face a rent increase. In this area rents are going up by more than 5%.

Call it Crazy says

So, which would you rather have, more cash flow in your pocket each year or spend those tens of thousands of dollars to gain a few bucks on your income tax return??

Agreed. He just asked if his numbers were right. I didn't mean to imply that his conclusion was incorrect.

tatupu70 says

If you only plan on being there for 7 years, you should take out a 7 yr ARM which is currently running ~2.875%. You shouldn't really include P in your calculation at all. It's not a true cost since you are paying yourself.

You still need to cover it if you have a drop in salary or period of unemployment.

And you didn't account for any tax savings. Even if you have no other deductions, your interest and property taxes will allow you to itemize and save some money.

Maybe.

Taxes = $4800/year
.04 * 200,000 = $8,000 in interest, total 12,800 annually
.02875 * 200,000 = 5,750 in interest, total 10,550 annually

The federal standard deduction is $11,900 for married couples filing jointly and $5,950 for all other filers.

As a married couple taking out the ARM his deduction would be $4600 higher than if he itemized. In the 28% tax bracket that would amount to $1288 a year or $107/month in savings.

As a single person taking out the 30 year loan he'd exceed the standard deduction by $6850 for a $1918 tax savings annually or $159/month.

You'll have to also pay for water, trash pickup, and higher energy costs.

Bigjim says

The statistics & assumptions used by Floridabill don't seem to be correct. In SM Co. my home Ins = $55/mo not $100. Flood Ins.=0 (don't buy in a flood plain). His maintenance & other costs also seem very high. Over a 26yr period mine are $200mo. That includes 2 new roofs. Get your ass off the couch & your face off Facebook & do some or most of the work yourself! Most people can learn to paint & do basic plumbing & other repair jobs. I look at homeownership as stablizing some living costs. Renting is only stable for the lease period, after which you face a rent increase. In this area rents are going up by more than 5%.

The area I'm interested in is very close to the bay, so I'd assume my wife to be would drive me insane if I didn't have flood insurance.

I hope the home owner's insurance is close to $55 but I'm estimating a little over just in case.

For Maintenance, I fully expect myself to replace and repair everything,except the big stuff.

New roof = $10,000 every 15 years. New A/C unit = 5k every 15 years. These are rough estimates but in the ballpark of what I should expect.
20k / 15 = 1,333 per year, or $111 a month.
New Dishwasher/washer/dryer/lawnmower can cover a bit as well to get up to that $200. Add in replacing lightbulbs, and other small stuff (paint and spackle) around the house and I think I estimated this pretty well. If I get by with less, heck yes, I just earned some money. But I don't want to be caught spending money on a roof when I didn't budget for it.

FloridaBill says

I can rent in the same exact area, a nice 2 bedroom condo for $1200 per month.

You said "house" and then you say you can rent in the same area a nice 2 bedroom condo. This is not an apples to apples comparison. I can only presume that the "House" you are buying for 250k is a 3 bedroom 2 bath, 2000 square foot standard house.

You are giving up space, bedrooms, bathrooms, yard, privacy, etc in this comparison. This might be a non-issue as you are just comparing your two options, but this is not a straight and fair comparison.

The real question is how much does it cost to rent that house in that area? Or how much does it cost to BUY that condo?

This makes me laugh the more I think about it. When you frame the comparison like this, it becomes more about living below/within your means than it does a rent vs. buy decision.

You could compare the numbers of buying a 1 bedroom 1 bath condo for 150k or renting a 6 bedroom 6 bath oceanfront house for 10k a month. Then you can say, "Wow, this is so obvious!! I'd be crazy not to buy right??"

Rent4Ever says

FloridaBill says

I can rent in the same exact area, a nice 2 bedroom condo for $1200 per month.

You said "house" and then you say you can rent in the same area a nice 2 bedroom condo. This is not an apples to apples comparison. I can only presume that the "House" you are buying for 250k is a 3 bedroom 2 bath, 2000 square foot standard house.

You are giving up space, bedrooms, bathrooms, yard, privacy, etc in this comparison. This might be a non-issue as you are just comparing your two options, but this is not a straight and fair comparison.

The real question is how much does it cost to rent that house in that area? Or how much does it cost to BUY that condo?

Correct, I am not comparing the same thing, I apologize if this was the assumption. I mainly wanted to get some opinions on my cost to own a house numbers, and how much more I would pay for the luxury of a house. There are very few houses, if any, to rent in the area, and usually they are overpriced. Going rate is 2.5k a month for rent something "worth" 250k.

Relatives on both sides of me and my future wife's family are pushing us to buy. I just sent my dad my figures in excel, and copied a link to this thread. He already agrees that I should wait a little longer.

FloridaBill says

Going rate is 2.5k a month for rent something "worth" 250k.

Thats the number you should use for your comparison then. Or compare it to buying a condo for $125k....

In theory, you get more utility from the house...

FloridaBill says

Correct, I am not comparing the same thing, I apologize if this was the assumption. I mainly wanted to get some opinions on my cost to own a house numbers, and how much more I would pay for the luxury of a house. There are very few houses, if any, to rent in the area, and usually they are overpriced. Going rate is 2.5k a month for rent something "worth" 250k.

Relatives on both sides of me and my future wife's family are pushing us to buy. I just sent my dad my figures in excel, and copied a link to this thread. He already agrees that I should wait a little longer.

This is a living within your means discussion then, not a rent vs. buy discussion.

FloridaBill says

The numbers (ran through Patrick's Mortgage Calculator):

Yeah, what a great tool! On the blue moon something remotely interesting comes to my attention I use it regularly.

I have found it to be accurate. If priced right, it sells. If I just like it, it's usually overpriced, then sits, sells eventually, or goes in and out the listing revolving door.

If I remember correctly there actually is a field for further drop in price. So far, drop, drop, drop. I have been upside down in a mortgage and would have lost money if I had purchased anytime before now. I don't like either scenario.

david1 says

FloridaBill says

Going rate is 2.5k a month for rent something "worth" 250k.

Thats the number you should use for your comparison then. Or compare it to buying a condo for $125k....

In theory, you get more utility from the house...

Using $250k for the house and 2500 for the rent with 0% appreciation and 0% rent increase, you should be be up ~80k in if you bought now and sold in 7 years.

Call it Crazy says

Bigjim says

Over a 26yr period mine are $200mo.

How the heck can you get away with only $200/mo.??? I was in the last house (which was in good shape) for 10 years and spent way more than that on average per month. I did all the work myself, didn't hire any outside labor. That was mostly material costs. I also didn't have any major hits like HVAC or roofs... mostly standard and usual upgrades/replacement items.

Either your wives don't like to upgrade or my wife upgrades too often and is nuts.. (OK, she might be a little nuts) but if you go through the normal replacement cycle of bathroom upgrades and kitchen upgrades, appliances, carpeting, fixtures, etc., It has to run over $200./month on average....

The biggest expenses were in the first decade of ownership. After a while all the big stuff was done & I coasted with just a few expenses. Then I upgraded a lot of stuff upon retirement. FYI a 25yr roof was $8K in 2010.

I went through this, bought and sold between 2001 and 2010, that house appreciated in value so much, wow! Assessed at 175k, bought for 125k, sold for 105k! taxes $3600, needed new roof, lots of things, I put new carpet in and sold it.

Selling costs also include all the months it's on the market, vacant. Renting is looking better and better. Realtors should go back to fast foods.

I rented for almost 20 years and recently bought. So I've had a lot of time to do the math. The answer is like most any other comparisons: It depends on a lot of variables. For example, perhaps you can rent a house for $1,200 a month in Florida, but around here where we live in the Bay Area you're looking at more like $2,000-$3,000. So Assume around $2,500. If you were to include insurance, taxes, and so on the total cost of buying would be almost exactly the same. Insurance, taxes, rents, real estate costs, and interest rates are all going to vary depending on location, time, and region. Our insurance is going to be about $60. Taxes are a bit less than what you stated- and that's here in Cali on a house that cost a lot more than $250,000. Also- interest rates are very low. We got in at 3.7%. Almost half a percent ( you stated 4%) makes a big difference for the monthly cost.

As a long-term renter I can see both sides. There is no problem in renting. There's also no problem in buying. It all comes down to individual finance and if its makes more sense for someone to rent or buy, then more power to em'.

david1 says

FloridaBill says

Going rate is 2.5k a month for rent something "worth" 250k.

Thats the number you should use for your comparison then. Or compare it to buying a condo for $125k....

In theory, you get more utility from the house...

I wouldn't buy a condo for $125K (if that was possible) so it doesn't matter to me how the costs might compare to renting an apartment with the same number of rooms which I would do.

There are at least two interesting comparisons which must be made for owner occupied properties:

1. Between what it costs to rent and buy the same thing. Both rental and purchase prices should be more stable in situations where purchase prices are rent plus overhead and a reasonable profit. Where there's an imbalance movement is likely, where either alternative is acceptable to live in one may be more favorable, and with favorable purchase price versus rent you may have a hedge if you decide to move early since you can cover your costs by getting a renter.

2. Between what it costs for what you're willing to either rent until the lease runs out (most likely in 30 days, six months, or a year) or pay a small fee (could be $x,xxx for two months rent) to leave early and what you're willing to buy where it may be 6-7 years before your principle payments equal the transaction costs and leaving early could cost you $xx,xxx with neither appreciation nor falling values.

I would and did live in a 450 square foot studio apartment for a year. Two people and a cat don't need much; although I did rent a separate 300 square foot artist's loft to get some space for my toys because I wanted more and that cost much less than a larger apartment.

I wouldn't buy anything without work space (I seem to average one big project every two years), two bedrooms to accommodate a returning child in their odyssey years, and two bathrooms (hopefully his without scented soaps like "perfect pear" and hers with but maybe ours and theirs).

At my last rental where I got a horrible neighbor and followed the police advice to move (because there's often nothing illegal about being a bad neighbor and where there are noise ordinance violations happening getting an officer there with a SPL meter to observe and document is a royal PITA) it cost me less than $1000 to escape.

At the last property I owned I changed jobs, did not want an intolerable commute, and lost over $10,000 getting out. It was only that low because a company relocating me covered all my real-estate transaction costs buying it, we sold it as a FSBO with no listing agent, and frothy appreciation meant it had picked up $20K in the six months we owned it.

robertoaribas says

Look, price versus rent is how i made all of my money in real estate. I bought in the 90's during the aftermath of the last crash, and sold in 2005, when price/rent went the wrong way. Here in Phoenix, it dropped to points where renting is much more than buying today, so I bought and am buying.

I just bought a home 2 weeks ago for $130K, that I instantly rented for $1500 a month. THAT is price versus rent. My mortgage with tax and insurance is $709 a month. Factor in vacancy and maintenance, and I'm still cleaning up on this one, like all of them.

BUT you have to compare similar things to similar things. Comparing a small 2 bedroom condo to rent, to buying a big home makes no sense.

This blog has become basically completely useless to anyone who needs to think about housing, due to worthless trolling by loser like housing pissbrain.

These people are loosers don't even waste your breath. Renters handing out real estate tips, passing out faulty infomation to each other. I think it makes them feel better about the threadbare brown carpet and avocado laminate countertops in their shabby rentals.

Housing Patrolman says

robertoaribas says

price versus rent is how i made all of my money in real estate.

You haven't "made" anything. At best, you knowingly misrepresent the truth to unwitting people.

Ok, next month when his tenant gives him a check for $1500 and he pays his mortgage of $709 he will make $791. That is $9492 per year, and likely tax free since there is a tax thing called "depreciation". It does not mean that your house is loosing value as inferred above but that one is able to shelter a portion of the purchase price from income taxes each year. So that will be a deduction of about $4815 in one year. I know, hard to imagine all these details when you are taking the standard deduction or renters credit.

I was having dinner with my uncle-in-law recently when the issue of real estate came up. We got around to monthly expenses and he explained how he bought his last SFH in Santa Clara sometime around '94 or '96 and currently pays a little over six-hundred dollars a month. I don't know what his salary was like at the time, but I know it was well inside of six figures. I actually felt too embarrassed after that to mention that my wife and I had been thinking of buying a place in Sedona with monthly carrying costs upward of 2400, and nudged her under the table when she moved to mention it. I started thinking to myself later: '2400??? What the fuck planet am I from? Has my perception of price/value become that distorted over the years?' (Actually, it's just that I hate subsidizing my landlord. The idea of paying for this shitty little man's vacations every summer has gradually diminished my aversion to overpaying for a house.)

I find it bizarre that his house (maybe 1800 sq ft) was purchased during a period of enormous economic froth and surplus, and yet, now, during a comparatively laggard and precarious economic/labor situation and following on the heels of one of the worst asset/credit bubbles in history, there is still such an appetite for overpriced housing -- and with the emphasis being on monthly affordability!

I realize rates were closer to 7.3 at the time that my uncle bought his place, and 20% down was standard, and it's got pink and silver foil wallpaper in the kitchen, (which is actually pretty bad ass), but still...

cw says

These people are loosers don't even waste your breath.

Yep. Just LOOSERS. With probably ugly outdated carpet. NO GRANITE! NO stainless or marble bath or vessel sinks with river rocks in the bottom, and no IPADS for these clowns! Probably they're dog is not special breed and not to many friends on facebook. Probably don't even belief in God. I guess I might be angry too if I was like that. They jest jealous is all... of all are TALENT and are investment genius!!! : > ) We are changing the world one investment property at a time.

Heres the secret to stop being a slob: you gotta be risktakers. Landlords like us are rewarded for our bravery the first of every mount.... Teh 5th at the latest.. You might not like us but you can not deny our daringness! We DARE to spend what we do not have to make some money that we can actually END UP having. Cowards fail and then want to tax the risktaking creative class. I used to be a coward. I used to actually work to make a buck. Broke my ass seven days replacing head liners in 125 degree heat so I could buy baby formula and night classes for my now ex-wife. Then I lucked on a book in the BARNES AND NOBLE about how to make $$$ work FOR you instead of working for IT!! Also how you should not work as hard as what my daddy did who worked hard but not smart and didn't know how to make a gazillion bucks on account of he was too busy slaving away at a lathe instead of simply buying up single family houses! I mortgaged my shop and bought my first two houses that way. I now own thirteen houses, two of them are mansions and also three Tutti Fruity franchises. Also my AMWAY riches.

As a I result I do not wear a shirt what does not have silk in it. I never eat leftovers and eat only expansive food.. as in I do not eat any meal without flamingo steak AND YES that includes my breakfastes. I do not drive a car without all leather seats and I have a gold ring on every finger. I have floor to sealing mirrors in my garage. Hi dollar - Jody Chunder. Ask around. I have a jacuzzi with lights and a TV on the wall of every room of my house which has five rooms. NO VCRS! Two TVs are flat screen. soon to be three.. Waterbed all king size. WWW on all of my 5 APPLE computers.

Sure Jody rented once and I understand you pain. I woke up drunk and angry at the world 5 days of 7. Stains on my clothes. Socks had holes. Sprite in my water cup at Del Taco. Soft bloody stools. Cleaned fish in my tub. Finally crashed my Jeep into a mountain. I have overcome. I have thirteen mortgages and I am fabalously wealthy. I can not almost believe it. I have the respect of the highest society in Victorville UNLIKE my dumbass brother who married a whore and ended up losing his big toe to diabetes. He rents a house what doesn't even have a garage and window units. And like my little Pheonician friend Roberta I am looking to buy another property this fall. I sure showed the world.

Thank GOD for us geniuses else there probalby would be no GDP!!! ; >

zesta says

david1 says

FloridaBill says

Going rate is 2.5k a month for rent something "worth" 250k.

Thats the number you should use for your comparison then. Or compare it to buying a condo for $125k....

In theory, you get more utility from the house...

Using $250k for the house and 2500 for the rent with 0% appreciation and 0% rent increase, you should be be up ~80k in if you bought now and sold in 7 years.

Let me clarify about the area. 99% of the working class here either wouldn't afford a $2500 a month rent, or would rather buy. Houses aren't renting as the home owners are trying to recoup their 2006 costs of ownership. The rents are way too expensive compared to the value of the house. I've seen one house for rent in the past year on zillow in the zipcode I'm looking at, and it hasn't rented in over 4 months so far.

They are selling at slowing rate, I see bank owned properties are half of what is being sold, the other quarter is short sales, and the last bit is regular owner sales.

Yes, you have to compare apples to apples when doing rent vs buy calculations. But in my case, I just don't have that option. My family was pressuring for me to buy to build "equity". With the math worked out, and the details clarified with the helpful information in this thread, building equity doesn't add up.

You should get actual quotes for home owners insurance. Here in New Orleans, Louisiana it is more like $500 per month or 5 percent of the purchase cost. This makes it even less likely that a purchase makes any sense.

robertoaribas says

my housing insurance in Phoenix ranges from $175 a year on condos, to $800 a year on my home in the worst neighborhood. A year. As in 15 to 70 dollars a month.

Sounds about right. Think I was paying about $800/year for my 3/2/2 in Texas.

Housing Patrolman says

MsAnnaNOLA says

$500 per month

WOW. Is that really typical?

In New Orleans it is. Traditional insurance companies have not been writing new policies for years. It is worse for multi-family. I think there may be some insurers willing to sell you a "normal" policy now. My boss has a multi-family. All he can get this the insurance of last resort, Louisiana Citizen's that the state runs. You end up paying top dollar for questionable insurance. So he is paying like $4,000 for flood and $6,000 for homeowners that has a 2% hurricane deductible. So if there is a hurricane claim you have to pay 2% of the home's insured value before you get anything. So it is a crappy policy that costs a lot of money.

His mortgage statement includes $1,500 to $1,700 per month for escrow on his $340,000 purchase price. That is taxes, insurance and $200 for PMI. The range is because it keeps going up and down slightly.

For my Fiancee and I this insurance has been a major factor. We shopped for houses and condos in 2006 but decided against it for a number of reasons. The fact is we are renters and for our renters insurance we pay $60 per month with State Farm. We have some expensive things so we are insured for big amount. This coverage does not however cover us for: flood, wind and hail, hurricanes. So it is kind of crappy coverage as well for what some of you are paying for your regular homeowner's insurance. By the way I have been their customer for a decade and never made any claim at all.

So our bottom line is with rent at $1,250 for a place that would cost $300,000 to $350,000 to buy we are literally leasing it for less than the cost of taxes and insurance. Our rent has yet to go up. So we are staying put for as long as we can pocket $1,700 per month. We have one other friend that has been doing this for years as well.

So despite all of this we recently talked to our friends who decided to add on to their house because the houses were like $200 per square foot when they bought. (same price as when we shopped) They need more space and they are telling us houses in their neighborhood which is relatively close to ours are going for $270 per square foot. Wow so I am guessing the bubble is being re-inflated here. Prices are even higher than post Katrina craziness.

I would love to hear from anyone else in the area that has an opinion on this. We live in a very desirable Uptown neighborhood.

Corrected some things on second and third read...

robertoaribas says

my housing insurance in Phoenix ranges from $175 a year on condos, to $800 a year on my home in the worst neighborhood. A year. As in 15 to 70 dollars a month.

why don't you guys just say home insurance costs $1,000,000 a year, it would be just as believable!

Would love to pay what you are quoting for insurance. Might have made a big difference when we looked.

Yes, you are missing some very important pieces:
1. Mort payment is fixed regardless of where inflation goes, while your rent is floating and depends on inflation. So you cannot project current cash flows 30yrs into future. For 7yrs calculation it is maybe not such a terrible approximation.
2. Tax benefit for mortgage (depends on your income taxes).
3. Charge return on equity on the down payment you put in. Keep in mind that your down payment (equity) is the first to go in the case property loses value. Since you are leveraging it 5:1 in the falling market, your equity is exposed to a lot of risk. You should charge at least 10% to 15% return on equity on your down payment ($50K) so that is additional cost (of mortgage) of at least $5K per year.

Another crazy anecdotal story I heard lately about New Orleans real estate from my doctor. She is thinking of putting her place on the market, but she has heard that our new one unified assessor for New Orleans has decided to up your house appraisal for tax purposes to whatever you list the home for. He is literally going through the MLS and upping people's assessments to the asking price of their house.

So what I would say to this is it that it gives a strong incentive for two things to happen. First, people will be very sure they want to sell before listing their property at any price above their current assessment. Second, it gives an incentive for people to sell outside the MLS as in between realtors before even listing in the MLS. This is in my opinion not good for a well functioning market. I think it is good for people to be assessed fairly. Assessing people based on a pipe dream is not right.

Do things sell outside the MLS...all the time. I bought my one and only place that way. We were the only ones who looked at it.

Do things sell outside the MLS...all the time. I bought my one and only place that way. We were the only ones who looked at it.
-----------------

Some states really frown on this type of Real Estate transaction. In the North East we call it a 'Pocket Deal'. I'm not sure if it's illegal or not? But most Brokers will dismiss Agents for this type of deal.

Nine6 says

Do things sell outside the MLS...all the time. I bought my one and only place that way. We were the only ones who looked at it.

-----------------

Some states really frown on this type of Real Estate transaction. In the North East we call it a 'Pocket Deal'. I'm not sure if it's illegal or not? But most Brokers will dismiss Agents for this type of deal.

Well what do people do that sell "by owner". Seems like as long as the owner is happy no one will complain.

MsAnnaNOLA says

Well what do people do that sell "by owner". Seems like as long as the owner is happy no one will complain.

Well this would be considered a FSBO For Sale By Owner and yes an agent can represent the buyer in this case.

But a Real Estate agent that carries your listing in his/her pocket and does not submit it on MLS is not performing his/her duties to the buyer.

I'm sure no Real Estate agent would ever even think of doing this!

FloridaBill says

I can rent in the same exact area, a nice 2 bedroom condo for $1200 per month.

Well I've never understood the point of buying a Condo.
But btw, most taxes are included in the HOA fees.
I think you're short on insurance(For Florida) and have over estimated for taxes. Taxes are going down in Florida, the only positive thing Scott has done.

Though I'm sure that's so the insurance companies can justify hiking the rates even though there hasn't been a Florida disaster in 7 years. Scott is all about the insurance and health industry squeezing as much money out of citizens as they possibly can get away with just short of a bloody revolt.

Not sure is the math works out.

Depending on your situation you might be able to deduct a lot more than the standard deduction because of the interest you're paying.

You're leaving out "Tax Deduction" with your numbers.

HRHMedia says

Maintenance costs will be more than $2400 on avg per year, likely 5k-10k on avg

5-10K on average?? That seems VERY unlikely to me. It will be closer to $2400 than it will to $10K. That's for certain.