Renting vs. Buying a home

[DLgal]

I can't even fathom paying $3250 a month in housing costs. Yikes!
I can't imagine renting for 17 years, paying $3000 in housing costs and no savings.
Was rent that high everywhere you lived?.

We do have "savings." College savings for 2 kids, retirement savings accounts, other investments, etc. We sink all our extra money into those, rather than a house down payment fund since we can't settle down and buy a home and each duty station only averages 3 years.

Yes, every place we have been stationed has had a high COL. First was San Diego, then Orange County CA, then Northern Virginia (near DC), and back in Orange County CA again.

Luckily, the Government (military) "pays" for our housing via a non taxable housing allowance every month, because we have to live where they send us. The amount is based on rank and duty station zip code, and it is supposed to be enough to cover rent and utilities for an average dwelling for a family of 4. Currently, our housing allowance is $3759, which covers rent and all utilities. So really, we see it as "free housing" although it is essentially part of his total compensation package. But for practicical and tax purposes, it is not considered "income."

 

[Julylady]

I started aggressively saving for a down payment after I got my first real job. When it got to the point when I realized my monthly rent payments were enough to cover a mortgage payment, I seriously started house hunting. At the time I underestimated what I would need for taxes and utilities that were covered in the rent payment. I probably should have waited another year or so because I had trouble making ends meet for a while. I have heard that renting is not a bad deal for senior citizens as they don't have to worry about any maintenance issues.

So, prepare an yearly budget where you estimate your mortgage payments, taxes, utilities, maintenance/repair costs. Divide this number by 12. Do you have that much money to pay toward home ownership each month?

 

[CdnCarrie]

Not as long as you use the proceeds from the sale of one house for the purchase of your next house. There is also a one time exemption you can take for selling a home in which you are not buying anything with the proceeds.

So presumably most families will never pay capital gains. I guess people who inherit a house would however.

Same as up here.

 

[Tigger in a kilt]

To be honest, it never even occurred to us not to buy. We got married young, and all the adults round us owned their homes, so it was just what we thought we were “supposed to do”.

Since then we have both developed health problems, and owning has been of huge importance: even if we ever got to the point where both of us were unable to work, we know we won’t be homeless. Certainly, that is the case because we never moved out of our first house, so had a very small mortgage. But that security is very important to both of us, given our health issues.

 

[CdnCarrie]

To be honest, it never even occurred to us not to buy. We got married young, and all the adults round us owned their homes, so it was just what we thought we were “supposed to do”.

This. Both husband and I grew up in the suburbs in homes. As did everyone I knew as a child.
I just always planned on owning. Never crossed my mind not too.

I have 2 single female friends who rent. One didn't buy after her divorce and the other choose to rent apartment rather then own.
Everyone else I know owns and all are paying off their mortgages in their 40s - early 50s depending on whether they stayed in a smaller home, upgraded, got divorced, etc.

Renting a home is just foreign to me. I don't know anyone who has personally done it but I see the benefits in some cases.

 

[tvguy]

Not all landlords have mortgages on their rental properties. Our landlord is a multi millionaire with several rental homes in both the Boston area and Southern CA. She buys the properties with cash in markets that are hot. She bought two of the same model house in our neighborhood brand new in 2015 for about $785,000 each. She rents them both out for $3250/month. BOTH those houses have appreciated rapidly, to the tune of being worth close to $1M each today. In fact, a house of the same model down the street just sold for $1.25M.

If she decided to sell them right now, she would net a profit of close to 30% in under three years on JUST the sale of the houses, (plus the rental income of $234,000, minus insuurance, property tax and HOA expenses). The only repair she has had with our home is a broken garbage disposal last month. Every day the value of our home goes up further. This lady is making money on this house (and probably all the others she owns) hand over fist with minimal work on her part since she buys mostly new homes to rent out. It is a great investment for her. We signed a 3 year lease with a locked in rental rate and just negotiated another 3 year lease with an increase of a whole $50/month. She is not interested in fleecing her tenants, she told me she wants us to enjoy living in her rental and stay as long as we want, and she wants to make that easy for us. She has had some tenants for over 20 years. The going rate for our home as a rental is currently $3750. In our city, approximately 55% of residents rent their homes. Using one of those Rent vs. Own calculators, it is 68% cheaper to rent in our city rather than own a home.

For perspective, our home is an 1800 SQ foot condo. Selling for $1M. It's insane.

Absolutely. But they still have to recoup the property taxes, upkeep costs, insurance etc, and THEY are passing those costs on to the tenants.\

The flip side of that is you can get into a position where you almost can't afford to SELL rental properties if you have owned them for a long time. A guy I went to college with inherited 20 rental properties from his Grandfather. His Grandfather bought 20 home kits from Sears in 1920 and some land. Grandpa assembled the houses himself. The cost PER house with land was about $1,500. They have been rental homes for 97 years. If my friend sold them at market value his cost basis is $30,000, the market value today us is about $4 million, all of that but $30,000 taxable at Capital Gains rates.

 

[Iya]

Not all landlords have mortgages on their rental properties. Our landlord is a multi millionaire with several rental homes in both the Boston area and Southern CA. She buys the properties with cash in markets that are hot. She bought two of the same model house in our neighborhood brand new in 2015 for about $785,000 each. She rents them both out for $3250/month. BOTH those houses have appreciated rapidly, to the tune of being worth close to $1M each today. In fact, a house of the same model down the street just sold for $1.25M.

If she decided to sell them right now, she would net a profit of close to 30% in under three years on JUST the sale of the houses, (plus the rental income of $234,000, minus insuurance, property tax and HOA expenses). The only repair she has had with our home is a broken garbage disposal last month. Every day the value of our home goes up further. This lady is making money on this house (and probably all the others she owns) hand over fist with minimal work on her part since she buys mostly new homes to rent out. It is a great investment for her. We signed a 3 year lease with a locked in rental rate and just negotiated another 3 year lease with an increase of a whole $50/month. She is not interested in fleecing her tenants, she told me she wants us to enjoy living in her rental and stay as long as we want, and she wants to make that easy for us. She has had some tenants for over 20 years. The going rate for our home as a rental is currently $3750. In our city, approximately 55% of residents rent their homes. Using one of those Rent vs. Own calculators, it is 68% cheaper to rent in our city rather than own a home.

For perspective, our home is an 1800 SQ foot condo. Selling for $1M. It's insane.

You sure know a lot of details about your landlord's finances.

 

[Iya]

This. Both husband and I grew up in the suburbs in homes. As did everyone I knew as a child.
I just always planned on owning. Never crossed my mind not too.

I have 2 single female friends who rent. One didn't buy after her divorce and the other choose to rent apartment rather then own.
Everyone else I know owns and all are paying off their mortgages in their 40s - early 50s depending on whether they stayed in a smaller home, upgraded, got divorced, etc.

Renting a home is just foreign to me. I don't know anyone who has personally done it but I see the benefits in some cases.

We've lived in our home for 16 years. Our mortgage will be paid off within a year.

 

[GreatLakes]

What are the disadvantages to owning your own home? We've been home owners for 50 years - different states - and have never seen any disadvantages.

When you rent, what you pay has a 'built in' maintenance amount in your monthly bill. No,it isn't stated like that, but it is. When the home needs appliances, new roof, etc. a smart landlord has $$'s put away (from your rent) that he uses for repairs, taxes etc. Trust me, they all know exactly what rents should be - with maintenance, taxes figured in. So, renters are not getting by without paying for these things, just don't have the 'bother' of them, but neither are you building any equity.

As for HOA, lived in one ONCE and done!!! Never again, with nit picking every spring on every tiny thing - and I mean tiny. We have certain covenants that prohibit unsightly things, but that's enough for us. We don't have to 'ask' if we can paint, change our landscapings, etc. They're protective, only.

The disadvantages to me are maintenance costs, and lack of mobility. Yes, you are paying for maintenance in your monthly rent but you don't have a $10,000 bill when you need a room, $2000 when you need to replace your garage doors and openers, or $1,000 because your tree fell in a storm. Your rent is still your rent and if your lease is up and the rent is raised you can leave.

If you are looking at a job out of state you also have to deal with selling your house which isn't a concern if you rent. You may have to break your lease and pay a fee but you don't have to worry about pulling the equity out of your house for the move.

I own my home so these are not enough of a deterrent but they are disadvantages.

ETA: I forgot about depreciation as a subsequent poster mentioned. If an area you live in goes to crap for one reason or another you can move without penalty if you rent once your lease is up. If you own you are eating the losses.

 

[tvguy]

Houses here average $350,000, but you pay $1000 a month for that average house in property taxes.

We had a property tax revolt here in California in 1978. Voters passed Proposition 13. Property taxes are capped at 1% of what you paid for the house.....the maximum allowed annual increase is 2% of that 1% figure.
What prompted that was some senior citizens back in 1978 were actually being expected.......almost always on a fixed Social Security income......to pay more each year in property taxes that they had paid for their homes 40, 50 or 60 years ago. I interviewed a lady who paid $2,000 for her house 40 years prior, and her property taxes were $4,000 per year. Her social security was about $6,000 a year!

It isn't a perfect system for sure. I paid $100,000 for my house 35 years ago so my base property tax started at $1,000 a year. With increases 35 years later, my property taxes at $2,100 a year. Zillow today puts the value of my house at $429,000. So if I sold it, the new owner would pay $4,290 a year property taxes for the same house, and same services based strictly on what THEY paid.

 

[soccerdad72]

So presumably most families will never pay capital gains. I guess people who inherit a house would however.

Essentially, yes. I'm not very well versed in inheritance laws, but without a trust in place, generally speaking, yes, people would pay taxes on the value of a home that they inherit.

 

[GreatLakes]

Essentially, yes. I'm not very well versed in inheritance laws, but without a trust in place, generally speaking, yes, people would pay taxes on the value of a home that they inherit.

I believe this is based on the state you live in, not federally. I'm not 100% sure though, I have never inherited a house.

 

[Darcy03231]

What are the disadvantages to owning your own home? We've been home owners for 50 years - different states - and have never seen any disadvantages.

When you rent, what you pay has a 'built in' maintenance amount in your monthly bill. No,it isn't stated like that, but it is. When the home needs appliances, new roof, etc. a smart landlord has $$'s put away (from your rent) that he uses for repairs, taxes etc. Trust me, they all know exactly what rents should be - with maintenance, taxes figured in. So, renters are not getting by without paying for these things, just don't have the 'bother' of them, but neither are you building any equity.

As for HOA, lived in one ONCE and done!!! Never again, with nit picking every spring on every tiny thing - and I mean tiny. We have certain covenants that prohibit unsightly things, but that's enough for us. We don't have to 'ask' if we can paint, change our landscapings, etc. They're protective, only.

One of the biggest ones can be a downturn in the market leaving you owing more than your home is worth or your house now being worth less than you paid for it. This could come from a housing bubble, economic downturn in the area (think Detroit), a major construction project right next to where you live, such as a highway going through your housing development, etc. Also, deterioration of the neighborhood. I know of one neighborhood in a former place I lived that was the "best neighborhood" to live in when I was growing up. The way the area has grown, however, has now made it one of the less desirable neighborhoods and it's hard to sell home there. During this time you've paid interest, taxes, insurance and maintenance.

Another can be high property taxes/insurance - sometimes higher than the cost of rent (such as where we live).

 

[nkereina]

Renting and owning both have pros and cons. One isn't better than the other, so its a very personal decision. Owning was attractive to us so we could have independence and freedom from landlords and neighbors in close proximity. But now that I've owned for nearly 6 years, there are days when I remember how nice it was to have my lawn taken care of and not having to shell out money for furnace or fridge repairs!

You'd be surprised how much you can be qualified for, but keep in mind that how much they qualify you for doesn't necessarily take into account your other expenses. Make sure the monthly payment they are quoting you is all in, including escrow things like taxes and insurance. That's your true mortgage payment every month, with utilities, cars payments, etc. on top of that. Just because they qualify you for a lot, doesn't necessarily mean you can afford that much. Don't spread yourself too thin. Also keep in mind ancillary costs of home ownership you may not consider off the bat - lawn fertilizer, snow blower (if applicable), gas for said snow blower or lawn mower, water and garbage bills (never paid that renting), HOA fees where applicable, driveway sealing, etc etc. The list goes on. Its more than a mortgage payment and utilities.

We love owning, much more than renting, and are very happy we made the decision even though the responsibility was scary at the time. I'd also recommend to build up a good savings account - with no landlord to lean on, repairs and maintenance are out of your pocket and you never know when they will pop up.

 

[FlightlessDuck]

The house we currently rent costs $3250/month. It is 2 years old and worth $950,000.

I think I found your problem.

 

[piccolopat]

Northeast NJ, I believe the highest property taxes in the nation. It’s a real problem here.

Same here in the northern NYC suburbs. Our property taxes also started out about $5K when we bought 25 years ago. They're now just over $18K. We'll be moving in the next couple of years. I'd rather travel with that money than pay these excessive taxes. It will be hard to leave since we love our home and community.

 

[Mackenzie Click-Mickelson]

Yes, you are paying for maintenance in your monthly rent but you don't have a $10,000 bill when you need a room, $2000 when you need to replace your garage doors and openers, or $1,000 because your tree fell in a storm. Your rent is still your rent and if your lease is up and the rent is raised you can leave.

I will say some things just come down to having good landlords vs not so good landlords. Maintenance-wise if it's your landlord's property you're at their mercy of getting it fixed within a reasonable amount of time. There are laws to protect tenants but you have to go through the legal system if your landlord fails to abide by the law.

A person I know had this happen during a bad storm last year in the rental house they are in:
including a piece of branch that went through the ceiling-

It took them weeks of arguing with the landlord because the landlord did not want to 1) clean up the mess or pay for it to be done 2) pay for the repairs. Renter's insurance is not going to cover the landlord's roof or ceiling. It did pay for any loss of their personal property due to the storm including water damage but not to the flooring, etc that was all the landlord's responsibility. They hated just hated that instead of dealing with it on their own they had to put tarps up themselves to prevent further water coming in and hope to heck that we didn't have another bad storm while they were dealing with the landlord who wouldn't work with them.

 

[tvguy]

So presumably most families will never pay capital gains. I guess people who inherit a house would however.

Same as up here.

The value of inherited is house is set at its value on the day of the death of the owner. So if you sell for more than that value, that amount could be subject to Capital Gains, but you need a tax professional to sort that out.
Inheritance taxes don't start until the value of the entire estate exceeds $5.45 million. With the average inheritance in the U.S. being $177,000, the average person would not pay any inheritance tax either.

 

[DLgal]

You sure know a lot of details about your landlord's finances.

She told me she paid cash for the house. The sale price is public record, plus it was a new home so the prices were also listed on the home builder website. She also told us she owned an identical home a few streets over for the same rental rate, about a year after we moved here, because her previous tenant had vacated and she was looking for a new tenant, so it was "hey, do you know anyone looking for a rental...send them my way if so."

When she came by a couple weeks ago to handle the broken garbage disposal, we chatted for awhile and she told me about her other properties in Boston and LA. She is a super nice lady, reminds me of my MIL. She is very chatty and open.

We were also quite close with our former landlords in VA. They were a military family as well with kids around our kids ages. In that case, we were basically paying their mortgage for them, and I am okay with that. We had NO desire to buy a home in VA.

 

[DLgal]

I think I found your problem.

What problem?

We are happy renters. We plan to rent until we are actual retirement age in like 25 years. We then plan to buy a home or condo with cash we have saved up in a low COL area. I have no desire to be a homeowner anytime soon. Maybe ever.

My parents rented in Los Angeles area for about 10 years after selling their home in 2004, then moved to a retirement community in Kissimmee area. They bought a brand new home for like $120k. They put $100k down and did a $20k mortgage that they will have paid off soon, in under 5 years.