Comments on: 24 Signs That You Could be in Financial Trouble #20: Purchasing a Home for the Wrong Reasons

By: BC

BC — Fri, 20 Jul 2007 13:32:46 +0000

Renting is not always a guaranteed loss. Actually, buying in some of the current markets is a guaranteed loss over almost any time frame.

You need to factor in the total costs of owning a home including up-front fees. You need to factor in the amount of money that you’re going to pay in interest (not principal), which in the first 5-10 years, is a huge chunk of your mortgage payment. You need to factor in how much less it costs to rent and the expected returns that you could get on that money, minus capital gains taxes.

I live in the DC Metro area. I pay $1150 to rent a nice apartment. If I were to buy the same place it would cost me 350k.

My model assumes 7% real market returns (the average long term real returns) and a 6.3% interest rate (current long term interest rates for people with great credit). Based on my calculations, if I paid any more than 200k for that 350k home, I would be practically guaranteed to make less money over any time frame than if I hadn’t bought at all.

The NYTimes has a nice calculator that runs the numbers for you. My own projections turned out to be substantially the same as those produced by the NYTimes calculator. The calculator can be found at the following address: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1184990400&en=79c508dac7ecd2e9&ei=5070

Note that the default assumed rate of return used by the calculator is 5%, which is ridiculously conservative.

By: debt kid

debt kid — Mon, 23 Apr 2007 08:22:33 +0000

Wish I had read this before I bought my home! Too late now…

By: danielle

danielle — Sun, 22 Apr 2007 03:02:30 +0000

We decided that renting was a better option for us after we started looking at homes to buy. No one ever tells you about all the extra costs that homeownership incurs. We live in an area with high property taxes, yet a low cost of living. There aren’t only property taxes, but association fees, mortgage interest payments, homeowner’s insurance, and repairs which can run in the thousands per shot. While home hunting, we learned why so many of our friends who own homes are broke all the time, even if they have 2 incomes and no kids. Typically in this area, if you pay your mortgage completely off, the amount you pay in all of these fees are just like having an average apartment anyway.
Besides, we don’t see renting as “wasting money”, because we have a home, a roof over our heads. We invest in other ways, and are happy with our choices. People our age need to be careful that the choices they make are *their own* and not our parents’ dreams. You should examine everything very carefully, and not just jump into something because it’s what our society says you should want. Make sure you really want it first. Too many people our age ended up screwed from listening to their parents.

By: CT

CT — Fri, 20 Apr 2007 17:14:42 +0000

I think you’re ignoring the main reason to buy a house: you don’t have to pay rent! Rent is a guaranteed loss, and in order for the landlord to make money your rent has to be significantly higher than the maintanence costs of the residence.

When the housing market is going up, the increased value of your home will offset the maintanence costs and property taxes. When the housing market goes down, you will lose money, but remember: you were already losing all of the money you were paying for rent. So the risk is not that you might lose money, but rather that you might lose more money than you were already losing by renting.