buy or rent?

nostatic · nostatic's Garage

ok, I've read the various threads over the past year or two, and I suppose I'll have to just break down and talk to an accountant, but I seem to see varying opinions on the value of buying over renting here in SoCal. Snowman claims that after writing off the mortgage interest the payment on a $4K/mo mortgage would be less than $1600 (my current rent). I don't remember the numbers coming out that way when I was married, but I didn't pay close attention. Plus we had over double my current income due to my ex's check. Wayne otoh seems to argue that buying, especially now (assuming a correction is happening) doesn't make financial sense.

Basically if I took most of my savings I could have 10% down on a condo in the 6-7K range. There is no way I can really afford the mortgage payment every month *before* taxes unless I quit racing or having much fun. But am I going to see that much of a tax advantage to make it worthwhile? Yes, I understand the equity side of things, but not very much builds up during the first few years and given our market I'm not depending on a major increase in market value.

kaisen · 07-02-2007, 06:50 AM

Isn't the difference right now somewhere between 'safe' and 'sorry'? With default and foreclosure rates at record highs I would think that there are still heavy corrections to come. Not everyone can just wait the market out.

I'm not is So Cal, but if I were, I would be renting, keeping my liquidity, and lying in wait.

Porsche-O-Phile · Porsche-O-Phile's Garage

If you can afford a traditional 20% down payment on a property (most people can't now) and get a 30-year-fixed loan only, I'd say it's worth considering. With any other type of loan (particularly I/O), you're throwing away your equity-building ability and you won't see any real tax benefit - at least that's the way it came out when I ran these numbers a few months ago. Yes, you deduct from federal taxes, but state/local property taxes make it almost a zero-sum game. Add HOA fees, maintenance costs, etc. to that and it's actually easy to end up in the hole.

My $0.02 is to stay far, far away from residential RE for at least a couple of years until all the poison in the system has had a chance to flush itself out.

The one I also come back to (and I haven't heard a good counter to yet) is - for a particular piece of property, why buy it at 1.5-3x (depending) the rate of renting it just to "buy" it, when I can rent it and take the difference in $$$, put it into stocks, mutuals, futures or options and make 10x the rate of return I'd get on residential RE right now - and that assumes you're exceptionally lucky in RE and don't lose (which is a distinct possibility).

Another thing to consider is that I believe there are options-on-futures for residential RE that are going to be coming out soon. I'll be buying a ton of "put" options on those.

Jim Richards · 07-02-2007, 06:56 AM

Your interest in the early years is the vast majority of your payment. You only get to write off the mortgage interest times your tax rate. If, for example, the interest portion of your payment is roughly $3000 per month, and you're in the 33% tax bracket, you reduce your taxes by $990/month. Your $4000/month payment effectively becomes $3010/month. This is just a back of the envelope calculation to give you a better idea of what this buys you, and doesn't address the accumulation of equity through paying down the principle and increase in value of the property.

nostatic · nostatic's Garage

yeah, I thought that Snowman's figures are "aggressive" to say the least. I'd be looking at an 80/10/10 mortgage (same as we had on our other place). I do remember a nice write-off from the Feds, but I also remember a $10k+ annual property tax. We were still ahead of the game, but not as much as one would think.

the · 07-02-2007, 06:59 AM

Quote:

Originally posted by nostatic
Snowman claims that after writing off the mortgage interest the payment on a $4K/mo mortgage would be less than $1600 (my current rent). I don't remember the numbers coming out that way when I was married, but I didn't pay close attention.

Congrats, you just formed a new category, "Those who even begin to read/take what Snowman spews seriously!"

It's only a category of 1 person right now, but it's off to an auspicious start!

nostatic · nostatic's Garage

Quote:

Originally posted by the
Congrats, you just formed a new category, "Those who even begin to read/take what Snowman spews seriously!"

It's only a category of 1 person right now, but it's off to an auspicious start!

hey, I like to think outside the box. I just don't want to live there. But he posted it on the interweb so it has to be true!

berettafan · 07-02-2007, 07:03 AM

Don't forget you get a std. deduction to begin with so your 'savings' don't start until you pass that base figure!

Something else to keep in mind, if you buy at a high price with a low rate you have zero chance of seeing your payment go down in the future (NOT talking about variable rates here) but if you buy at a low price with a high rate you can hope to refi one day when the cycle comes around!

BTW, i think you answered your own question when you said 'stop racing and having fun'. Kick back and bank some $$ for a while and don't be in such a rush. You might consider trying to find a rental property that pays for itself (doesn't have to be nice of course) if such a thing exists in Ca. This will keep you in the market and allow you to build equity and not feel like the clock is ticking away on your future.

Rot 911 · 07-02-2007, 07:11 AM

Todd, the interest and property taxes paid only reduce your taxable income. They are not a dollar for dollar reduction on taxes owed. For example in the tax year 2006 our mortgage interest and property taxes amounted to $17,357. This only reduced our actual federal income tax owed by $2343.00. Our house payment is $1500 per month. Our property taxes amount to another $200 per month. You can see that our monthly payment is only reduced by about $200 per month when you factor in the tax benefits of owning. In your case you are $$$$ ahead by renting.

Joeaksa · 07-02-2007, 07:15 AM

Will never rent anything again unless forced to. You are paying someone else's morgage payment and they make money when the property appreciates.

Just the way I feel but my house has gone from $205k to over $500k value in 5-6 years. Hard to beat an investment like that.

nostatic · nostatic's Garage

true Joe, but you're not in SoCal. That kind of appreciation has already happened and we're on the other side of it now.

kaisen · 07-02-2007, 07:18 AM

Quote:

Originally posted by Joeaksa
Will never rent anything again unless forced to. You are paying someone else's morgage payment and they make money when the property appreciates.

Just the way I feel but my house has gone from $205k to over $500k value in 5-6 years. Hard to beat an investment like that.

True, but I wouldn't bet on that happening in So Cal any time soon. Also, rent there isn't really paying someone else's mortgage (at today's values). If buying is $4K and renting is $2K, you are paying only half of their mortgage. If it makes you feel better: They are paying YOU $2K to live there!

Joeaksa · 07-02-2007, 07:19 AM

Todd,

They are not making any land anymore. Its going to go up in value almost everywhere. I lived in San Diego years ago and was thinking about buying a place then. Everyone told me "its stable here, not going to go up in value very much" so I did not.

The place I was going to buy for under $100k back then is now worth $2.4 million bux... I rest my case.

Jim Richards · 07-02-2007, 07:20 AM

What's good for one person, isn't always good for another. Todd, I'd save/invest if I was in your shoes. And keep racing and have some fun.

nostatic · nostatic's Garage

true, but out here you're barely buying any land. Basically I can afford a condo, which was built on what used to be a single family home lot or is a converted apartment. Either way I think there is somewhat of a ceiling on the value of these...at some point no one can afford to live. Salaries haven't doubled in the past 5 years (at least mine hasn't), and I don't see housing prices here doubling again in the next 5 years. Not enough income to support it as far as I can tell.

berettafan · 07-02-2007, 07:25 AM

you don't get a housing allowance as moderator? c'mon Wayne help the guy out!

Rick Lee · Rick Lee's Garage

Nostatic, also take into consideration how long you plan to keep the condo. Not too many people see themselves living in a condo for their whole lives, so it's not really worth paying for a 30 yr. fixed mortgage. Unless you plan to keep it and rent it out after you've upgraded, get an ARM. Though my condo has appreciated nicely, I'm sort of wishing I were a renter now, as I want to move and selling my house is gonna be a ton of work and probably cost a lot too. Renting allows you just about pick up and leave anytime and that's worth something.

LeeH · 07-02-2007, 07:30 AM

Quote:

Originally posted by Joeaksa
Just the way I feel but my house has gone from $205k to over $500k value in 5-6 years. Hard to beat an investment like that.

Yeah, but Phoenix is high on the list of overpriced markets that are likely to suffer several years worth of declining prices. We've been discussing selling our house and renting for a few years. Invested conservatively, the money from the sale would cover rent on a similar or possibly larger house. After prices bottom we could buy the larger house.

daepp · 07-02-2007, 07:38 AM

Never buy a house for tax reasons. And don't buy one for an investment. The reason to buy a house is because you wish to own a house, you wish to pay it off someday and live payment free, and you want to be able to do with it as you please. There is also (albeit not for everyone) and sense of satisfaction to be had in home ownership that you can't get from renting. That is certainly the case for me.

Porsche-O-Phile · Porsche-O-Phile's Garage

We need another nice big earthquake. That'd go a long way to fixing this ridiculous RE market.