Rent or Own?

This post is a learning exercise for the author. I really don’t know very much about real estate. We bought one three bedroom two and a half bath track home 23 years ago. We paid it off in less than ten years. We still live in it today. End of story.

I always thought when I retired I would sell my existing house, move to a lower cost area, and buy a similar property, a one level brick box that required less maintenance. About a month ago, a coworker gave me a different idea to chew. His friends retired to Florida. After several years of vacation visits to different towns in Florida and a great deal of research, they picked out the perfect house in the perfect town. However, after two years they decided they made the biggest mistake of their lives. They sold the perfect house in the perfect town and moved somewhere else. Given the time frame, I suspect they suffered a considerable financial loss. My coworker recommended renting after the retirement move for a year or so. This would give me time to consider my options without making a major financial commitment.

My mind didn’t stop there. I thought, why should I buy another house? Could renting be a better option? When we first married, we didn’t have enough money to buy a house. As time went on, we had more money but the interest rates of the 1970s made renting a better choice. In 1987 our rent jumped something like 10%-12% in one year! We decided it was time to buy a house. I intuitively made a decision that was quite sensible. My mortgage payment (excluding taxes and maintenance) on a three bedroom home was lower than the rent on a two bedroom apartment. But where to draw the line?

It seems there is a rule of thumb. Always remember, a rule of thumb is a rule that only works thumb of the time. Take the annual cost of renting a property then multiply the result by 15. If the sale price of the property is greater, rent. If the sale price is less, buy.

Example:

Renting a three bedroom home in a certain city costs somewhere around $1,000 a month.
Hence $1,000 a month X 12 months in a year X 15years = $180,000
Therefore, if this home sells for less than $180,000, buy it.
If the home sells for more than $180,000 rent.

Of course there are other considerations. Since beginning this study, I have presented the problem to two real estate agents, one in Maryland and one in North Carolina. They both came back with the same answer, “Well what if property values are increasing?” Yes, choosing to rent right before inflation goes ballistic would be a terrible mistake. However, buying at the 2006 market top has left many people in upside down mortgages they can not possibly escape outside of foreclosure and bankruptcy.

Ask, “How long do I plan to stay in this property?” I have looked around the web for an appropriate rule of thumb. It seems that five or six years is a normal kind of break even time frame. Maybe renting for the first year in a new area makes a lot of sense even if home prices start to recover. Am I so certain the decision to move to a particular new location is correct that I am willing to commit to five or six years?

Of course there are tax implications. In the early years of a mortgage, interest deductions are a powerful incentive to buy, rather than rent, a home. However, I don’t plan on carrying a mortgage unless I decide to buy a rental property. If I buy another house, as I plan, I will be paying taxes on that house and bearing the cost of maintaining that house. I will also lose the opportunity to invest that money in stocks or other income producing assets.

Maintenance is becoming more of a problem. As I grow older, I am less and less amused by yard work. Given my heart condition, my wife will no longer allow me climb on the roof and nail the weather stripping back down after a bad storm. Work that requires kneeling, such as working with bathroom or floor tiles, hurts my arthritic knees.

Normally, for young couples, the down payment is the deal killer. An entry level home in this area runs about $300,000. That requires a down payment in the range of $30,000 to $60,000. I am not certain what closing costs on such a property might run, but I would guess somewhere in the $10,000 to $15,000 range. We had to cough up about $8,000 in taxes or fees of one sort or another at closing as well as a $9,800 down payment. That was 23 years ago. Coming up with that kind cash is hard for young folks.

The final question is, “Can your monthly budget accommodate the property you want to buy?” If you are living paycheck to paycheck in a rental property, the answer will almost certainly be no. Even if your parents help with the down payment and closing costs, it is unlikely you can cover the higher mortgage, insurance, taxes, and maintenance costs of owning a home.

Right now I am thinking about renting for at least the first year in a new location unless I am made an offer I can not possibly refuse.