Buying a Home

[Dedekind]

I'm currently renting a place. Please read the following and tell me whether my decision to rent is wrong or not.

I own a few financial-independence books/audio claiming that I'm losing money and that my landlord is getting richer.

But I'm not really buying this, because in these books/audio the gurus always seem to be assuming that you live in a place where housing prices are always going up. How come the possiblity of housing market crashes is seldom mentioned? They naively keep assuming the prices will always be going up. I name two examples of where such assumptions are made: David Bach (in his Automatic Millionaire audio) and Eddie Solomon (in his Financial Independence book).

The reason I'm still renting (I'm 25) is that even though I'm not getting to own anything, and even though I'm technically burning my money every month, I consider that I'm protecting myself against even further losses that I could incur from market crashes. Plus, I inherently hate loans. They feel wrong for some reasons. Okay, a 1-2 year loan to start a business is healthy; but commiting yourself into a 30 year loan just feels wrong. Anything can happen in 30 years. It's simply a too long time.

As opposed to when I rent, if the house burns down to the ground, then I'm in no troubles. Plus I don't have headaches that must be involved in having a huge loan on your back. Plus worry about this and that: Maintainance, insurance, etc. Plus, it psychologically feels better to own X amount of cash in a bank account rather than spend that X on a down-payment and own zero in the account.

What do you think I should do?

Currently, my idea is to do this: (1) Keep on renting for a few more years. (2) Don't worry too much about losing money renting for now. Because the mindset of begin worried about measly $10k here and there throughout one's lifetime is bound to make one's mindset very limited anyway. (3) Focus instead on increasing my earning ability, getting education, gaining knowledge, building up brainpower, and focus on being in a position where I have a guaranteed X salary no matter what.

What do you think?

[elijjah]

There's good reasons to buy a house, and good reasons not to. It sounds to me like your reasons for not wanting to buy a house are mostly based in fear. Fear of a market crash and fear of loans. From a financial standpoint, buying a house is the most sound investment you can make...with a few caveats. The most important is that you have to be able to cover the mortgage. The people who are in trouble right now have gotten that way by buying more house than they could afford and/or by being swindled by unscrupulous lenders selling them adjustable loans they couldn't afford.

The good thing about the market today is that the banks have tightened up their lending practices so it's much harder to get a loan you can't afford. (also, harder to get a loan you can afford).

From number 2 above, I think you're looking at it wrong - don't stop renting because you may be losing a little money, start owning because it makes you a lot of money in the long term. For what other investment will a bank loan you four times what you put in at about 6.5% interest?

And number 3 above certainly lowers the risk for buying a house, because as long as you can make your payments, you don't have to worry about ups and downs in the housing market, you can just wait them out. And as long as you buy something in a good location, you will be able to sell it when the market recovers.

I just bought my fifth house (primary and four rentals). My primary residence I've had for 10 years, two of them I bought about four years ago, and I just bought two this year. These have turned out to be my best investments, even with the down market today (although Seattle hasn't been hit as hard as other places). There is risk out there, so find a good realtor who can help, read all you can about your real estate market, and jump in.

I documented what I did for my latest purchase -- finding the house, financing it, etc on my blog at Step by step guide to buying a rental property. You might find this helpful (or maybe not).

Whatever you decide to do, good luck to you!

[silicon toad2000]

I'm of the opinion that renting may be a better way to go. Even though I own my own home.
If you buy a house it will cost you a lot in interest. What you need to work out for starters is what the market value of your rental property is, what the mortgage repayments will be and what the difference between the mortgage repayments are and the rent you are paying.
If you were to put that difference into a managed fund over the 30 years it normally takes to pay off a mortgage what would the future value of the money be comapared to the future value of the house less the interest payments.
There is no easy answer and there will always be another variable you need to factor in like returns on the managed funds, interest rates, inflation, housing growth, extra bills you need to pay as a homeowner, depreciation of fixtures and fittings...
If you do have a house you have an excellent capital reserve you are able to borrow against to invest, but you also have that capital reserve tied up in the house and it is very costly to liquidate.
Have you thought about continuing to rent and buy a place to rent out to take advantage of any tax breaks and negative gearing?
Lotta numbers to crunch.
and then there's the qualitative aspects which are even harder to figure....

[elijjah]

If you are thinking of this purely as an investment, you also need to consider your location, at least at the city level. For example, Seattle has a long track record of above average appreciation (compared to the US), continues to grow in jobs, etc. During the downturn it has been hit less hard, and there will be a market for houses here for the foreseeable future.
In rural Iowa (for example), a friend of mine owned a house for five years, and sold it in 2005 when property values were up nationwide, and he ended up upside down on the mortgage and took a loss.

I just looked around on the internet and found this link in the New York Times. It takes into account at least some of the costs/expenses of buying vs renting. You can set the appreciation of the house, along with the rents going up, insurance and taxes, and what the average earnings you'd get on your investments. There are probably other calculators, or make your own excel spreadsheet.

[Dedekind]

Thanks for the replies so far. I guess you're right in some ways, but still buying a home I feel depends too much on prices going up.

Plus, taken into account that I might go abroad for education after 1-2 years (sorry I forgot to mention that earlier), maybe I should just stick to renting for a while and buy a place when I finally decide to settle down.

[Honeywith4bees]

Originally Posted by Dedekind

But I'm not really buying this, because in these books/audio the gurus always seem to be assuming that you live in a place where housing prices are always going up. How come the possiblity of housing market crashes is seldom mentioned? They naively keep assuming the prices will always be going up. I name two examples of where such assumptions are made: David Bach (in his Automatic Millionaire audio) and Eddie Solomon (in his Financial Independence book).

I think that those authors are looking at trends over the long term. For example, I bought my first home 12 years ago for $75,000.00. The value of the home in those twelve years rose to $250,000.00 until about 15 months ago when the housing market started to fall. Now I'd only be able to sell it for about $210,000 or $220,000. Thats still more than I would have earned in any interest bearing account.

Originally Posted by Dedekind

As opposed to when I rent, if the house burns down to the ground, then I'm in no troubles.

Unless you have purchased Renter's Insurance, you are probably worse off with a rental if there were to be a fire because your personal property would be lost. Homeowner's Insurance would pay for me to find alternative housing while my house was repaired and reimburse me for a portion at least of my lost or damaged property.


It sounds to me though, that you aren't ready to make the commitment to buying a home so it's perfectly all right for you to continue renting until you are!!

Good luck!

[Dedekind]

Actually I'm not too sure about whether I'll go study. From what I hear from self-help and self-development sector education is severy overrated. But for some reasons my mother wants me to do graduate studies.

[Dedekind]

Originally Posted by Honeywith4bees

It sounds to me though, that you aren't ready to make the commitment to buying a home so it's perfectly all right for you to continue renting until you are!!

Good luck!

Thanks. Yeah guess you're right. I'll just wait for a while until I'm ready

[RichesWithin]

As far a real estate goes I have a bigger picture view. It is never about the short term investment. I have owned 2 primary residences and owned 2 rental homes. I was a mortgage originator for several years and I have bought houses at the low and the high of the economy.

Without a doubt real estate is the best investment you will ever make. If it burns down you're insured. If the econmy goes down it ALWAYS comes back so just don't get yourself into a situation where you have to sell in a recession period.

Although you are right that there have been times when the housing market drops dramatically there has never been a time when it did not rebound. If you look at the history of any type of investment compared to real estate, over the long run real estate wins every time.

The other huge benefit is the tax right off of the interest on your mortgage. Anyone who has a large income will make sure that they have mortgage debt for the tax benefit. It's what Robert Kyosaki calls leveraged debt.

When you are ready to live in an area for a while do youself a favor and buy a house.

[jendoe]

Hi Dedekind,

I just recently bought my first house, and am honestly regretting it already (just bought in March). (I too had heard from everyone that I HAD to buy a house, and that I was THROWING AWAY my money on rent!)

My experience so far has been that the house is like having a second job (in the worst sense of the word!) I already have a job that completely drains me (and am using my free time to try to fix that) - now my free time has become even more drastically reduced.

(And I have a townhouse, it's worse for a normal house with a yard, from what I hear.)

There *always* seems to be things that need to be done - whether it's extra cleaning (I've got more space in the new place), or figuring out the alarm system, or figuring out the tax issues, or trying to uninstall something the previous owners left.

There's also ALWAYS things that require money to fix. My 13-year old water heater (not up to code) will need to be replaced soon, I had someone come to spray the shower tiles so they'd look nicer/newer, and they broke the fixtures, which required a call to the plumber. I've got a hall closet with a built-in cat box (long story, and I have no cat) that I want someone to remove - oh and surprise - the cute little extra add-on room that was just built before I bought is apparently not sealed properly, so it's getting a huge amount of big scary bugs - and I can't figure out who to call to seal it (the management company for the townhouse won't bother).

It's alot of hassle, it's alot of extra time that I'd rather be spending on figuring out what I'm doing with my life and doing things I'm passionate about that bring me joy.

And, even though I actually bought a quite reasonably priced place (about the same as what I was paying in rent) - it's still a lot of extra money. Between maintenance, taxes, things breaking, interest on the loan, HOA stuff, insurance (I've got condo insurance, so cheaper than a real house) -

I really miss my apartment, which was bug-free, no maintenance (worst-case I called the company, they fixed things within 24 hours), and really nothing for me to do but enjoy the rest of my life!

And on top of all that - if something happens and I need to move, I've got to figure out the whole selling thing. Ugh, doesn't sound fun.

For me, the house was a mistake

On the other hand - there are times when houses make sense, for some people.

I know several people that really didn't have any hobbies, that did GREAT with a house - because the house (the maintenance, the renovations, painting, finishing basements, etc) BECAME their all-consuming "outside-of-work" hobby. They seem to really enjoy it (and they have beautiful homes!). Home renovations are NOT my passion, so for me - it's all extra "chores" that detract from my life, for them it's fulfilling and fun.

And some people DO make nice amounts of money (though I think it was already mentioned, usually it's over a long period of time.) For me, I was doing fine financially without the house - I had a small (1b/1b) apartment with a reasonable rate (though it kept going up) and I was very good at putting money into my savings.

Anyway, just some thoughts. I'm still reeling from my home purchase and wishing I hadn't done it. I'm not sure how much of my stuff applies to you, but hopefully the different perspective is at least somewhat useful!

Good luck!

[iwantamillion]

Buying a house is not just a financial decision. Remember, you are the one who determines value. If you find a great place, in a great location and it would make you feel great to live there, then buy it, if you can. Stretch a little, if you need to. A house that makes you feel like a million dollars can do nothing but add to your overall wealth (wealth coming from the old word weal, meaning your overall good).

My first house I bought on the cheap intending to move somewhere else as soon as possible. Shortly after, the economy tanked and we wound up living somewhere that was barely ok for over fifteen years. When we finally moved, we made very little on the sale, and we didn't gain much from the house.

Our second house we really like. We've lived there ten years on a couple of acres with a creek that flows after a day or two of rain. We used to worry about the monthly payments, the interest and principal balance, etc., but the fact is, we enjoy the place. We are talking about another place, but we could just as easily live here for another ten years. And our property has almost doubled in value since we bought it. Most of that increase is going into maintenance, which is something else you need to figure in when buying.

So rent when it's right for you to rent and buy when there's something worth buying--for you. If you love it, someone else will too when it comes time to sell.