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when is renting smart?

Posted by bmh4796 (My Page) on
Fri, Aug 30, 13 at 15:35

so here's our situation:

we built a house in 2006 in a suburb across the river from the city in which our 3 children go to private school. afternoon carpool and extra curricular activities are getting to be a problem for me and the baby. we have to pick up whichever older child doesn't have an extra curricular for that day at 3pm. then we all have to drive around town in terrible traffic and kill time while we wait for whichever child to finish practice at 6. this is getting more complicated as the activities are getting more "serious" -- the older 2 just started 5th and 6th grade.

so, we decided that even though we love our house and neighborhood, it is time to move into town where school, friends, restaurants, shops etc are. the prices of houses are crazy in town and all need a LOT of fixing up. i'm VERY picky, so we started the hunt last September. we didn't have any luck, so we bought a lot in a new neighborhood.

before doing so, we asked the builder that we liked if he thought he could build for us and not go over 350,000 on a 2500sf house. Our lot was 117,000 and we don't want to go over 500,000 for the whole package (house and lot). He said yes.

We hire an architect for 10,000. Drew up the house over the past 6 months. The builder's bid came back at 415,000 to build it. got a few other bids. they were similar. We worked on cutting it down to 400,000. There's nothing more to cut. we have 4 kids and 2600sf is what it came out to.

So, we need some more time to save up before building the house. BUT we need to get across the river. We found a cute little house that will do for us for a year or two. Is it smart to buy this cute little house as an interim house or should we rent?

I'm thinking it's always smarter to buy if you are pretty sure you will break even when you sell, right?

we have a buyer for our current house in the suburbs.


Follow-Up Postings:

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RE: when is renting smart?

It wasn't smart to buy in 2007 with the intention of selling 2 years later ... it didn't work out well for many and the prices took 6 years to come back up (very desirable Los Angeles town). All those people were pretty sure prices were going to keep going up!

I would rent. If you own the house you could have major maintenance or repair expenses come up.

Keep your current house, sell the lot and use the money to pay a taxi/limo service to chauffer the kids to/from activities.


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RE: when is renting smart?

There might be a few exceptions, but in this case I would rent for a year or two.


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RE: when is renting smart?

The idea that it is always smarter to buy helped cause the last housing crisis. I would rent while you save up. You will also save money along the way in maintenance costs


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RE: when is renting smart?

Renting you be perfect for your situation. You better put in the rental application asap. Rentals go very quickly in many areas.


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RE: when is renting smart?

I'd definitely rent in your situation. Considering all the transaction costs in both buying and selling, you'll likely come out way behind, even if you sell it for more than you pay for it.

In general, one should rent when one knows one isn't going to be very permanent in a location. That's you to a tee.


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RE: when is renting smart?

Are you able to qualify for a construction loan if you sell your house in the burbs and buy the cute little house? AND, are you okay with being a landlord? If so, you might buy the cute little house with the intention of renting it when your house is built.


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RE: when is renting smart?

yes. we will qualify for the construction loan with the cute little house. the cute little house is only 50,000 more than what our suburb house is selling for. the cute little house was built in 1990. it has a new AC, roof, and home warranty. it was just painted professionally both inside and out. has a nice yard and is in the middle of town. the only updates people may want when we go to sell is countertops. it's tile granite in the kitchen and cultured marble in the baths. we may have to update the kitchen with slab granite.

selling the lot is NOT an option because the town is running out of land. there's practically NOTHING left that's centrally located. what is left is 300,000 and up

Baton Rouge never experienced the housing crisis. Soooo many people moved in from Lakeview, New Orleans after Hurricane Katrina.

Prices were kind of stagnant for 2 years and building slowed down but prices stayed pretty high.

NOW, that's not to say that it won't change in a year or 2 if the economy totally tanks. maybe renting would be smarter, but i just feel like it's throwing away money. to rent a 2 bedroom apartment here is 1600 dollars a month and we have 4 kids. we would be horribly cramped, and i really think that we will be waiting to build for 2 years rather than one.

this "cute little" house actually isn't little. it's 2300 sf. 4 bed 2 bath. our note will be about 1500 a month. we will be putting 20 percent down. closing costs will be about 2,000. my husband's firm does closings so we will get a good deal.

do you still think renting is better? i can't seem to justify not earning equity. but maybe I'm wrong??


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RE: when is renting smart?

I would only buy the house if you would be okay with staying there long-term if the market winds shift. I agree that it would be nice to earn equity, but if you really are considering selling in a year or two, would the market rise enough to cover basic costs like agent fees? If your values didn't crash in the downturn, I'm guessing they also aren't rising as quickly as the market corrects, so you might need to stay for longer than a couple of years in order to break even--the house will need to appreciate enough to cover your buying costs plus your selling costs, at a minimum. (And remember that the down payment could otherwise be in some sort of interest-bearing account, too, so you would need to sell for enough to account for that--though interest rates are pretty low now for most short-term saving options, too.)

How much would it be to rent a comparable house? One thing to remember is that the true monthly cost of the house isn't just your mortgage, but also whatever you pay in taxes and homeowner's insurance, less whatever tax benefit you get from the mortgage interest deduction. I would do the math and see how that compares to the cost of renting a similar house, and go from there. It's not a sure thing that you will be building equity, especially with such a short time frame--since most of the mortgage payments for the early years of a loan go to interest rather than principal, if you sell in two years your balance won't be much lower than what it is today. If it still makes financial sense taking all that into consideration, then buying could be the way to go, though.


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RE: when is renting smart?

I would only buy the house if you would be okay with staying there long-term if the market winds shift. I agree that it would be nice to earn equity, but if you really are considering selling in a year or two, would the market rise enough to cover basic costs like agent fees? If your values didn't crash in the downturn, I'm guessing they also aren't rising as quickly as the market corrects, so you might need to stay for longer than a couple of years in order to break even--the house will need to appreciate enough to cover your buying costs plus your selling costs, at a minimum. (And remember that the down payment could otherwise be in some sort of interest-bearing account, too, so you would need to sell for enough to account for that--though interest rates are pretty low now for most short-term saving options, too.)

How much would it be to rent a comparable house? One thing to remember is that the true monthly cost of the house isn't just your mortgage, but also whatever you pay in taxes and homeowner's insurance, less whatever tax benefit you get from the mortgage interest deduction. I would do the math and see how that compares to the cost of renting a similar house, and go from there. It's not a sure thing that you will be building equity, especially with such a short time frame--since most of the mortgage payments for the early years of a loan go to interest rather than principal, if you sell in two years your balance won't be much lower than what it is today. If it still makes financial sense taking all that into consideration, then buying could be the way to go, though.


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RE: when is renting smart?

The above post is excellent. I think two years is pushing it. Any equity you receive will be eaten up by buying and selling costs. Will the home appreciate at least 6% or so to cover basic real estate commissions? How much will the new countertops cost?


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RE: when is renting smart?

You may want to consider the following option I didn't see mentioned above:

Sell the suburban house, especially if you have a buyer. Rent the cute 1990 across the river and build now.

It looks like you are 50k from where you want to be in terms of building cost, and it seems it is suggested it will take 2 years to save that 50k from the posts above. The 50k is a known cost today. Some of the opportunity costs that need to be weighed against that 50k are the mortgage interest write off lost for two years (e.g. 2k mortgage X 12 = 24k *.28 (tax bracket) = $6720 x 2), plus the increase cost to build in two years (e.g. 2.1% CCI x 350K=14.8k), plus the potential interest rate changes in 2 years (400k mortgage @ 4.5% payment = $2026 P+I vs. 365k mortgage @ 5.5% + 2072 P+I), when added up may not actually be better off waiting...


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RE: when is renting smart?

gina, good point. i tried this angle with my husband. i didn't want to wait, but he just wants to make sure that we keep our savings padded for unexpected things like braces etc. then the baby will be needing private school tuition in 3 years. we COULD build now, but we would use up a lot of our savings.

i guess it's sort of like that old saying, " you have to have money to make money". even though it might be cheaper to build now, my husband says it doesn't mean we should. :(

renting something with 3 bedrooms would be 1700 versus 1400 mortgage. that mortgage includes homewoners insurance and property tax. if we buy the 1990 house there is no realtor fee --listed for sale by owner. we would sell by owner too or with an agent that charges 2% when we turn around in 2 years or so to sell. baton rouge has its own by owner website called for sale by owner baton rouge. it has been really successful.

don't get frustrated with me. i'm still trying to make sure you know alllll of the details. 1400 a month including insurance and property tax plus a 2000 dollar closing and no realtor fee VERSUS 1700 a month rent in a small apartment.


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RE: when is renting smart?

You will not get into an MLS for 2%. You may find a listing agent that will accept 2.0% for their cut, but you need to add the other 2% or 3% for the buyer's agent.


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RE: when is renting smart?

You will have 2 houses to sell in the next 2 years, by your admission.

Here, that would be about 20% (10% each house) lost to broker fees, sales fees/taxes, and commissions.

So, by selling your current house and buying the little in town house you've just lost your down payment.

If, no matter what, you will be moving, you can consider it only a 10% loss--the cost to sell your current house.

I can see your husband's point, but if you HAVE to move for your sanity...

Ask if you can live at the small in town house for 5 yrs. If the answer is yes (to account for unforeseen things), then I'd buy it. I don't think your situation will improve as rapidly as your DH thinks (because, I agree with you that interest rates will rise again). I think your best situation is to stay where you are, and save those closing fees. But, since that is not a LIFE situation that you are willing to do (and, I can totally see that too!), then, I'd buy.

But, I wouldn't assume I'd only be in the little house 1-2 yrs. I think you might find you are there 3-5 yrs. Can you live with that?


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RE: when is renting smart?

yes kirkhall, if we are there 5 years, i'll be disappointed, but i can do it.

we already have a buyer for our suburb house. my neighbor's little sister and her husband have signed a purchase agreement contingent on selling there little garden district house. we didn't have to list our house at all. they didn't have an agent, so that worked out great! also the 2300sf house in town is listed on for sale by owner baton rouge so there would be no agent involved in that transaction either. if we buy and then sell it in a couple years, i will list it on that same local website - no agent fees.

gosh i hope we can build sooner rather than later. i've envisioned the flow of our lives and pictured our family in each space during the architect phase. it stinks that we have to put it off.

i would stay put in our suburb house but we signed the purchase agreement to move out no later than january. when we signed, we were in the blue print phase. we really thought we were going to start building in July.


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RE: when is renting smart?

If you bought the little house, will the extra $50k cost of this home delay the start of building your new home? Will you need to save $50k more before you can start building?

Will you be able to qualify for contruction loan if you owned that little home?

-----I'll give some background on my situation. We sold our home and moved into a rental for 3 years while we found the perfect lot, designed a brand new home and built it. At the end of the 3 years we moved out of the rental and into the newly built home.

In hindsight, I realized we should have bought a home for that 3 year interim rather than rent. We would have made between $50k ad $150k profit on resale if we would have bought a small home for those 3 years, because real estate values were rose during the entire 3 years.

But we rented instead. And the last 8 months of the rental was awful because the landlord decided to put the home up For Sale. This was while we were in the middle of building the new home. We were hands on in the building and also worked full time and had pets at the rental. So we had to schedule around every showing of the rental home so we could remove the pets prior to showing. Every minute of our time was scheduled then, due to working and building. Then we had to keep a rental home clean and ready to show. It was an awful experience. Then we didnt know if the rental would sell a few months prior to our home being ready. At that point we were on a month-to-month lease so landlord only needed to give us 30 day notice. We would have gone to an extended stay hotel for a few months while storing furniture. Nightmare. If we owned we would have set our schedule for move out. Ends up the rental didnt sell while we were there so we moved out as soon as new home was ready. But it was an extra stressful few months.


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RE: when is renting smart?

You can do the math - this is from Kahn from the Kahn Academy on Renting vs. Buying a home, The math of renting vs. buying a home.

Here is a link that might be useful: Challenging the notion that it is always better to buy.


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RE: when is renting smart?

All this discussion of money here doesn't address the quality of life issue. Which is a very large factor in this equation. Living that far away from all your childrens activities is a stressor and inconvenience. The amount of time you spend in the car traveling and waiting is not going to get any less as your younger children get older and enter into school and activities.

It would appear that getting closer to where your family life actually happens, whether renting or buying, would greatly enhance your personal quality of life and your children's quality of life. This change might not effect your husband so much as I get the impression he doesn't participate in the daily shuttle of children on a regular basis to the extent you do. Although the happy wife happy life axiom might definitely apply here.

Honestly, in my mind, 6 people, especially as young as some of them are, in a 2 bedroom apartment would be very stressful even for only a few months let alone 2 years.

It sounds like the 2000sq ft house would put you in the area where you want to be, reducing your stress. It won't increase your cash flow significantly thus allowing you to continue to save for the building project. The 2000 sq foot house will have enough room so everyone can function well whether the time is 2 years, 3 years or 5 years.

I would mentally commit to 3 years in the interim place and know it could be as much as 5. Stuff happens, more tuitions will need to be paid as the years go on, as they specialize in their activities they get more expensive. Plus you could always rent it out if you didn't see enough growth in the market between now and when you actually want to leave to move into the new build.

I know I am going against the conventional wisdom but at this point the decision doesn't seem to be entirely an issue of money but quality of life and that was not being addressed.


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RE: when is renting smart?

Khan Academy!?! Awesome. I had no idea he did stuff like this! I thought it was just school subjects - my kids use it!


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RE: when is renting smart?

You're lucky to have a good FSBO site in your area. If it's widely used, then you can certainly reduce your transaction costs significantly.

I would still very carefully do the math, though. Make 2 columns and add up the costs of renting and of buying. Use a comparable house rental, not a 2-bedroom apartment.

Renting: the only cost is the monthly rent.
Buying: mortgage closing costs, monthly payment (includes taxes & insurance), maintenance (estimate based on what you spend on your current house), selling costs (we sold a FSBO, and it still cost us around $1000 total (list on FSBO site, attorney's fees)). Deduct the tax write-off.

And the biggest thing to factor in: the illiquidity of real estate. I've sold 3 houses in my life when I had to move, and every single one of them took a while to sell because they were in down markets. That means 2 mortgages, and just the mental stress while you're waiting for the sale to give closure, so factor in that risk as well, since you don't know what the market will be like when you sell in a couple years. I've moved twice when I was a renter and it was a piece of cake.

So do the math, and then figure the risk of a large, illiquid asset. I'd only buy if the math said it was WAY better to buy than rent, because that cash savings would offset the risk. If it was close (a couple hundred a month), I'd pay more to rent, just for the flexibility when you move into your new home.


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RE: when is renting smart?

for all of the reasons that snoogie mentioned, we are buying the "interim house". husband works works works - so no carpooling from him.

financially, he expects to make more than usual in the next 2 years - he's still climbing at his firm and it took a while to gather up his cases and get them started. now that he's been there 3 years, things are starting to pan out. we have what we need to build the new house, but we just don't want to stretch ourselves. what if child number 2 needs braces as child number one did - that sort of thing. we don't want to dip into our savings TOO much, so we will pad our savings over the next few years for the build and hope the market stays strong in town so that when we sell the interim house we break even.

a part of me really wants to go forward with the build now, but my husband says that we need to do the responsible thing even if it feels overcautious. it's a good bit of commotion we are going through when we COULD build the new house. i can tell that the builder is disappointed too.

oh well. delayed gratification, right? ;)


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RE: when is renting smart?

In a few years you might decide to stay in the small house and sell the lot for a nice profit. Who knows, maybe you decide to get a vacation home instead and maybe you both realize the small house is perfect anyway.


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RE: when is renting smart?

I'm laughing at the idea that a 2300 sq ft house is a "small house." Absurd.


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RE: when is renting smart?

2300 for 6 people is fairly small. I figure about 500sqft per person as a comfortable dwelling size. For my family of 4, 2300 would be large. But, for a family of 6, not so much.


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RE: when is renting smart?

bmh:
Remember us in a couple years when you've made the transition, and come back and give us an update on how it pans out. Good luck!


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