Monday, September 19, 2011

Buyer's Guide - Step #1 - Time to Buy a Home or Continue Renting

This is clearly a personal question with many different intricacies for different individuals / couples.  I can though, tell you about our experience and what I found that helped us come to a decision.

Before moving to the suburbs we were renters in NYC.  New York City likely has the most vibrant rental market in the US but it is also characterized by exorbitant prices, renter beware situations, and sometimes real estate agents who can do more harm than good.

When we moved to Westchester we continued to rent.  I think the first impetus to really think about buying a home came when we received our lease renewal statement from our landlord.  Our rent was set to jump significantly, in part because we had signed our first lease (18 months) not long after the bottom of the housing crisis.  While we had expected a jump in our rent, this increase was more than we had anticipated.  Thankfully, we could easily afford the new rent and still be able to put money away every month, but the key question really hit us: could we be doing better owning rather than "throwing away" rent every month?

If you do a quick search for Rent vs. Buy, you'll quickly find that most calculators out there are too complex, asking you to make assumptions about long term rental rate increases versus the appreciation of you first home's value, minus some annual depreciation, minus the cost of capital for your mortgage, don't forget the tx benefits of paying mortgage interest which varies depending on your marginal tax bracket and marital status, minus the money your savings could have been earning if they weren't applied to a down payment,... and don't forget your 15 year outlook on mortgage rates, whether you think a flood might occur EVER, and so on.

As we began to think about this, it really boiled down to a few things: #1 could we make a commitment to stay in one place for at least 5 years, and #2 do we really want a house.

#1 - committing to a town - do you really love it where you live or where you are looking to buy?  Do you want to become involved with your neighborhood?  Does the area provide good schools, whether you have kids or not, or will you need to relocate if your family grows?  These are difficult questions, but I used the word "love" for a reason - I think it is something you just know.  And even if you do feel like you love where you are looking to live, it's probably a good idea to go on "dates" with other towns for a day.  Pamela and I took the train or the car to a few other nearby towns that had been recommended to us to really test our feelings.  If you start looking at houses in your area but can't get that feeling out of the back of your mind that maybe this area isn't right for us, then you probably should consider renting for longer until you are sure.

#2 - do you really want a house - my boss, who was unaware that I was looking for a house, had told me that homes are "money pits" - things break, things need fixing, and if you aren't fixing, you'll probably decide to upgrade or renovate something.  Once you do that, you'll forever be in cycle of renovation projects.  I bring this up to hopefully get rid of that notion that rent = money thrown away, while monthly mortgage payment = building equity.  If you are looking solely for the best choice financially, you can make a case that owning is better than buying, but renting gives you the optionality to move every 12 months if you like and that really is quite valuable.

Outside of wanting to make the best financial decision, do you want / need more space?  Do you want a yard?  Do you want to have to take care of a yard (mow, rake leaves, etc)?

Back to those calculators - they were clearly developed during a time which is not similar to current times.  They all use this concept of "how much do you expect your home's value will appreciate each year" and "how many years until you sell, realize your profits, and plow them into your newer/bigger/better home".  I don't think that's going to be the case again for a while.

Deducting mortgage interest from your annual taxes really is a great benefit for homeowners, but I viewed that as an annual true-up - it wasn't part of thought process for the month to month expenses of owning a home or renting.

In summary, the rent vs. buy decision is largely based on intangibles, in my opinion.  We'll discuss some of the more detailed aspects of budgeting and comparing costs in a later post, but the simplest way for me to get past spending lots of time crunching numbers at this point was to recognize that the renting and buying markets are priced, by definition, to be about equal.  What I mean by this, is that if I own a house or apartment that I am looking to rent out to someone, I know that over time as the landlord, I will need to make some repairs and that each month I need to recoup more than the amount I put towards my mortgage payment.  The universe of renters out there are people that need a bit more flexibility to be able to move in 12 months if need be, or perhaps they want to buy, but need to save up more money for their dream home.  They have to be willing to pay monthly rent that is greater than the cost of paying a mortgage on that same home, plus a bit more for the optionality to leave in a year.

At this point, you need to decide, if the cost of renting a house was equal to owning it, would I be happier owning?  If you see yourself living in a home of your own and that gets you excited, then you should continue to the next step - figuring out how much you can afford.

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