7.16.2007

The Upside of Renting

I've been talking to people a lot lately about buying a house- primarily because it's been on our minds, and hopefully will be in our relatively-near future. We want to go into the process well-educated and prudently, so we're reading all we can about the 'proper' way to go about choosing a first home. An interesting article on Get Rich Slowly today was the first one I've read arguing against buying a home, or at least running some numbers to show the excess cost in home ownership that sometimes isn't talked about. Like I said, we're trying to take everything into consideration.
The calculations from the article are from Seattle, and basing the numbers off renting vs. buying very similar 3-bed, 2-bath houses in similar neighborhoods:
Let’s look at how the monthly costs break down (approximately) for our hypothetical potential first-time homebuyer:


 Renting   Buying   
Rent/Mortgage:   $1,495$2,093
Insurance:$20$163
Property Tax:-$407
Tax Savings*:-($327)
Maintenance:-$354
Total:$1,515$2,690


Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That’s not exactly chump change.

There are a couple differences to our situation in these numbers. First, a 3-bed, 2 bath house in Seattle costs $424,950. To get a similar starter home here would be closer to one-quarter that amount, so our numbers are smaller, just to clear that up. Second, this example has a house that will result in a significantly higher mortgage payment than the rent payment, and this is not something we plan on doing. Yes, a mortgage on a house will be higher than our rent on a one-bedroom apartment, probably, and we need to take into account the other costs listed. Can we handle them in addition to the mortgage payment? The bank will lend us $X amount, but what is a responsible amount to spend on housing? When do we want to have the house paid off? Or do we not plan on staying in the home until it is paid off? How much margin do we want to leave in our budget? What other long-term family and financial goals do we have that we need to plan to leave margin for? So much to think about. At the same time, renting for now has allowed us to save up a down payment we're happy with, and we can't wait to talk to a realtor & check out some of the houses we've only driven by from the outside. Hopefully the house-hunting time, which should begin in about a month, will not be too stressful, and our research will pay off. I can hope, anyway.

I know some of you are going through this process right now, or have recently. What's your perspective? How did you prepare and research when you went to buy a house, and was it worth it? For those of you who haven't yet, is it in the future? This article makes renting make sense, when I never thought it did. Check out the whole thing.

(Another interesting Get Rich Slowly article is also worth checking out, Why Religion is an Important Part of Personal Finance)

6 comments:

Charles said...

I think you should be really sure where you want to live before you buy. Renting gives you time to decide. I talked to someone in our neighborhood who said they rented 5 yrs. while researching and deciding where they wanted to buy a home. Talk to others and get their experiences on house buying. (Hint: Talk to your Dad.)
Get a realtor you're comfortable with and who knows the area where you're looking to find a home.
Love, Mom

Brett said...

It seems like the made some HUGE assumptions to make Renting seem so appealing. Do the manage rental property?

We've run a lot of numbers in our house hunt. And I mean A LOT. Going with the house we're currently looking at, the comparison comes out like the following:

Rent
Rent: 745
Pet Fees (1 cat + 1 dog): 40
Insurance: 20 (estimated)
Electric: 100
Total: 905

Buy
Mortage: 740 (146K house, 20% down, 6.5% interest)
Insurance: 50
Electric: 92 (average for year)
Property Taxes: 120
Maint: 100 (You may spend more but I only counted the unpleasant kind of home repair)
Tax Savings: 90 (purely a guess)
Total: 1204

Difference: 299

There are a couple things to note in our calculations. First, our electric bill is actually higher in our 800-900 sq. ft. apartment than we had in our previous 2000 sq. ft. house. And it’s higher than the monthly average for the 1700 sq. ft. house we’re looking at. And that’s in the summer! I can’t say I’m surprised that the apartment complex put in the least expensive A/C money could buy. I also did not factor in the short-term lease surcharge or the cost of the storage unit we’ve rented during our house hunt.

Granted, $299 is still a good chunk of change. But, for us, a house offers a lot of things, relative to the apartment, that aren’t quantifiable in dollar amounts. The “short” list”

1. Not having your washing machine, dryer, A/C fan 10 feet from your kitchen table. Can you say “what did you say?”?
2. Full size washer/dryer. No more loads of 3 pairs of jeans.
3. Not walking the dog 6 times a day.
4. Not smelling your neighbor’s Indian food wafting into your bathroom.
5. Not wondering what else has touched your carpet while your son plays on it.
6. Using your outdoor grill.
7. Having semi-efficient utilities that don’t have to run every 3 minutes.
8. Actual grass.
9. Space to have more then 4 people visit.
10. Room for hobbies. Being able to build things in the garage.
11. Not having cops stopping in your apartment complex weekly.
12. No overflowing dumpsters.
13. A place to walk that’s not a parking lot.
14. Believe it or not, I actually LIKE working on my house. And trips to Lowes CAN be fun.
15. Not hearing our neighbors hang pictures…daily.
16. If your neighbors don’t pick up after their dog, who cares?

I can go on. Really, I can. I'm not biased at all, am I? The point is, the dollar amount is only part of the equation. For us, the benefits outweigh the additional cost.

Like Charles, be sure you know where you want to be when shopping for a house. Also be sure about "what" you're looking for. Look for the more intangible things like how space "works" together and the location of nearby parks, etc. Unrealistic expectations one way or the other can be costly with a house. Apartment living does give you time to plan (or scheme) and that's a huge plus. The last thing you want is to rush into something that big. For us, the other benefit is that we'll appreciate our house all the more.

The Tim said...

Hi, The Tim here (author of the guest post over at GRS). Glad you found the article to be interesting.

I'd like to mention that I'm not necessarily trying to "argue against buying a home," rather I'm trying to argue against blind faith in the "common knowledge" about homebuying.

I was trying to point out all of the things that most common comparisons tend to ignore, but in fact are important to consider when comparing costs.

For many people (especially those like you that don't live in a coastal city) the numbers I give for Seattle seem so extreme as to perhaps be made up or cherry-picked. I assure you that is not the case. Seattle is just an extreme example, and similar rent to buy ratios are common around here. If I were living in Indiana, I'm sure the numbers would work out much more favorably toward buying.

Joanna said...

Thanks, The Tim, for your input. I was questioning the numbers, like some of the commenters on your post, but I'll take your word for it :) I appreciate your input and perspective in the post, making us think about other, unconsidered costs when buying a home.

And, Brett, I am looking forward to a lot of the things you mentioned, including a full-sized washer & dryer & a yard. Josh is particularly looking forward to having a garage for room for hobbies and a house to take care of (He's ALREADY at Lowes every day.)

Oh, and Charles is my dad, but that was my Mom's comment, in case you were wondering.

And, we're definitely using our apartment time to scheme ;-)

Brett said...

I certainly wasn't trying to "bash" renting though I'm sure it sounded that way. Honestly, my wife and I has been somewhat spoiled in that we've lived in a house for all but 9 months since we graduated in 1999.

The are good things about renting. After only a couple months, I know our current neighbors better than I knew those we had at the house after living there 3 years. It is genuinely less expensive. Our apartment is closer to work than any house we're likely to find (in our price range, at least) so it's less expensive in time commitment, too. I haven't mowed a yard since April. But, again, it's a very long Pro vs. Con list that, for us, leans toward buying. That will vary a lot depending on the person.

I know you'll be responsible with the house (or not the house). Take your time. If we had been more thoughtful prior to our last house purchase, it would've save us a lot of headaches...and money.

ashley@twentysixcats said...

I think there are positives to renting. My husband and I have talked about when to buy and when to rent, etc. We decided that it was in our best interest to rent a little bit longer (another year or two) for a variety of reasons.
1) We are not sure what area of town we want to eventually settle. Also, neither of our jobs are long term right now, and so buying a house based on job locations seems unwise. Renting allows us the flexibility to find the best possible place to live before committing.
2) We are still young and haven't had a chance to build up our credit score nor our savings much. Renting for now gives us time to work on that.
3) We can live in a decent area by renting an apartment for cheaper than if we bought a house in the same area. We would have to go to more run-down neighborhoods to find a house in our budget. Renting is cheaper than a mortgage, for us.
4) We have a lot of debt right now, and focusing on paying that off in the next few years will probably be better in the long run. (Thanks, Dave Ramsay!) Renting allows us the flexibility to cut our costs should something unforseen happen - i.e. a job loss or baby. Renting is also less worry and headache than home ownership.
5) When something breaks, we can call someone else to fix and take care of it. Renting takes care of the maintenance issues!
6) We have access to a pool, tennis courts, fitness room, and the security of a gated community. We would probably have to pay extra for that or not have it at all if we owned a house. Many apartment complexes have nice amenities included that you don't find with houses.
7) No yardwork! Renting allows us to enjoy a landscaped "yard" without having to do anything ourselves.
8) When I get annoyed at something about the apartment, I just tell myself that we'll be gone in a couple of years. Renting isn't long-term.

Of course, I'm not saying that renting is better or that these are reasons why you SHOULD rent. These are just some positives, and some reasons why WE are not going to rush into buying a house before we're ready. Mostly, we are torn about the location of where we want to live - we want something where we can raise a family an area that's not going downhill! I think it's wisest for us to wait and see how the next year or so of our life plays out (in regards to jobs, kids, etc.). While we can't ever know the exact future, I definitely don't want to put ourselves in a position where we find that we are in over our heads.

My in-laws have rented all their lives - they've never owned a place of their own. I personally think THAT is unwise, and I'm not advocating renting long-term like that. I'm glad my husband disagrees with his parents on this. :-)

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