My last post titled Have Fun Pissing Your Money Away was shared on Rockstar Finance. Rockstar Finance has a large following of Personal Finance Gurus, and the wisdom they shared in the comments is inspiring.
So much so, that I want to highlight some of the gems in todays blog post. Keep in mind, these folks are experts in their field, many are personal finance bloggers, some are landlords, and all are passionate about topics of money and finance.
Down Payment and Costs of Buying and Selling
NatPhorU, a landlord in Boston, discusses the opportunity cost of a large down payment and reminds us to include the costs of buying and selling in our buy vs. rent decision making.
Renting likely does not require you put up a massive amount of cash up front. Putting aside for a moment that rent is likely at least comparable to mortgage + all hidden expenses, the opportunity cost of tying up a large sum of cash in a down payment is huge. In Boston, 20% down could mean throwing down $150k+ just so you can have roughly equivalent ongoing costs.
Also, closing costs and agent fees. People seem to not factor in the costs associated with the act of buying and selling. Just breaking even on a house that appreciates at the rate of inflation (which is the historic national average rate of appreciation) normally takes 7 years.
I have had a house appreciate 20% that I lost money on because of only living there for 2 years – the closing costs alone completely wiped out the appreciation. I was instead left with a total of 0% return on my original down payment and an extra tax bill for the “gain”.
Time Factor as related to Proximity to Work
Bill Joyce is the Broker and Owner of Charter~Home in Sacramento, and blogs at Surviving the American Dream. He shares the time impact of living just 10 minutes further from work.
The time required on each property will be different. This is not just a rent vs buy discussion either, but one property vs another. Large homes cost more time than smaller homes. Perhaps the biggest use of time relates to the proximity of a home to the places you need to go. Work, school, store, gym and all if the destinations that make up your life.
Moving 10 minutes further from work will add 80 hours a year to your commute. So the move out to that big house in the suburbs can have some pretty surprising impact on the time you have available (the time version of disposable income) to enjoy your life.
Differences in Locales
I don’t have any background info on Jacq, but here we see some financial considerations of living closer to work. Seems like life always forces us to choose between time and money. Wow, that rent increase in the city!
It is a personal decision usually with many factors. Some can be emotional. I wanted to feel settled, vs one foot out the door feeling of renting. Where I was, (in an apt complex) rent increased at each lease renewal ($30-50/month aka $360-500/year). In my industry raises are not the mythical 3%, so as rent, cable, fuel prices, health care, increased and salary stayed level, my projections meant a decreased savings rate.
While I didn’t full see it as ‘throwing money away’, even if some of it was going towards mortgage equity it would be a forced saving plan, where I might see the money again some day. I also got a new job, so the time factor of the commute was important. Rents closer to work would be $300-500 more per month. This job I can see being at for 5 years, another aspect of settling in/down.
For other people renting is ideal. Different areas of the country also make a huge difference in rent cost and house prices as well as property taxes. Do what is right for you.
NinjaPiggy, Personal Finance Blogger, shares an interesting observation about the size of your home. This right-sizing idea is an interesting twist to the rent vs. own discussion.
Another overlooked benefit with renting is the fact you are more likely to “right-size” when you rent vs. when you buy. Most people buy a big house they can “grow into”, but rent a house that is a more reasonable size for where they currently are in life. The cost savings here can be huge.
Kevin and Ramona are Personal Finance Bloggers at Couple of Cents. They specialize in helping couples make smart financial decisions. Here they discuss the concept of “group think” as it applies to home ownership.
There is a lot of group think around home ownership. It’s not always better from many perspectives. Ultimately there’s the financial side and the emotional side. Everyone has to decide what’s important for them, run the numbers (which most people who blindly say you should always buy don’t), and then make a decision.
Bill Banholzer blogs at Wealth Well Done. He finds yard care relaxing and enjoys taking care of little things around the house. The tidbit I liked best from Bill, was about “being handy”.
I personally have owned my own home that cost me under 200K for the last 2 years. When I moved in, I was a bit nervous because I didn’t think I was “handy” or “mechanically inclined” enough if a major problem arose. It turned out, with the help of YouTube and a few tools, I’m alot handier than I thought, and I actually enjoy the little projects I create to improve the quality of my life inside my home.
Investing in Yourself vs. Investing in Property
Frank is a landlord and shared a number of good thoughts, covering the landlord perspective and highlighting the importance of considering your employment situation/stability/location when deciding on housing. My favorite from Frank has to be his thoughts on young professionals choosing to rent.
I agree with you especially for young professionals. I spent 10 years renovating my first house only to sell it for what I bought it for. 100’s of hours spent renovating that would have been better spent getting a graduate degree or otherwise improving my income potential. Which would have paid off better long term even if the house did appreciate. Your time is best spent investing in yourself unless real estate is your focus.
Money Tied Up in a House
Physician on Fire makes some excellent points about the opportunity cost money tied up in a house.
We have a lot of money tied up in our paid off home.
Let’s say it’s worth $300,000. If we had it invested and earned a modest 5% a year, that’s $15,000 a year. Add $4,000 for taxes, and $5,000 for utilities and home maintenance, and that’s $24,000 we would have to spend on housing if we didn’t own the home.
You can get a pretty nice place in most parts of the country for $2,000 a month. The math doesn’t favor the homeowner as much as one would think.
Landlords as Renters
Kurt Fischer, Personal Finance Blogger at My Money Counselor, makes an interesting point that some landlords are also renters.
I wonder what the commenter would make of the fact that many landlords rent their own living quarters?
I think you’re right on in suggesting that people at least consider all the implications, financial and otherwise, of rent vs. buy. Blindly following the conventional personal finance wisdom herd is a lazy person’s strategy. We can do better!
Thank you to all that contributed to this discussion. I appreciate the thoughtfulness that went into each comment from our regular readers and from our new guests! The wisdom and tact that went into every comment contributes to a better Internet in which we all get along, share our views, and help others. Special thanks to J.Money for featuring my articles! For more great content on the topics of personal finance, budgets, and investing, check out Rockstar Finance and Budgets are Sexy.