Advice on renting vs. buying?

**1bassoon** · 06-26-2008, 11:19 PM

Looking for some impartial feedback:

My dh and I have lived beyond our means for quite some time now - with 5 kids and one income, not too hard. We have a chance to start over: selling house, moving to new state.

We should come out of the house sale debt-free (!!) with 50K in the bank. Right now, we have no savings and very minimal retirement.

Advice on the following options?

A) Buy a cheapo, small (1600sf) home, put 20% down and the mortgage would be less than rent. Sell it in the spring, and look for our "dream" home - on 2-3 acres.

B) Buy a cheapo, small (1600sf) home, put 20% down, pay off the mortgage like crazy for 4-5 years, then buy something bigger. (By then, we'd have only 4 kids at home and looming college bills)

C) Rent a good size home for our family (800-1000K per month) while we look for a home to buy.

C) any other ideas?

I think if we did B), everyone would think we'd gone off the deep end - so that's what Dave would say, right? My personal analysis is that we've gotten into trouble b/c to buy a home that our family fits - and I'm not talking a mansion here - we've had to have a mortgage payment that's 25% of takehome pay. . . . .

Like to hear your thoughts and perspectives - thanks!

**Bournecrazy** · 06-27-2008, 06:28 AM

i'd say go for B, but it was me i would make sure i am buying not renting as i think of rent money as 'dead money' as if you bought something with a mortgage then 4-5 years of payments will have made the mortgage lower than you started out with, plus you will have the extra $$$ if you wanted to move after a few years, and if you could pay a bit extra off each month

**Greebo** · 06-27-2008, 06:36 AM

Actually i think C is your better option. You're forgetting a major factor in buying/selling a home. Closing costs. Don't worry, EVERYONE forgets closing costs...

If you did A, you would lose thousands of dollars in closing costs. If your closing costs were JUST $5,000 (that would be about a $100,000 home, or less, depending on where you live), then if you lived in the house for 6 months before selling, the difference between renting and buying would need to be at least $835 a month to break even. No way are you gonna buy a $100k house and pay a mortgage that's $800/month less than the rent on a similar sized house. And then you'ld have closing costs on the sale in 6 months, AND on the dream house. My rule of thumb, btw, is that you will pay 6% in closing costs to buy, and 3% (transfer taxes) to sell. That may vary in your area, ask a real estate agent in the area, or a lender.

So if you buy a $100k home, and sell it, and then the dream home is a $150k home, your closing costs will be 9% of 100k + 6% of 150k, or $18,000.

If you did B, well - that would be better, but again, $18,000 in closing costs on the buying of 2 houses and selling of 1. In 5 years, to break even on the closing costs, now your savings on the mortgage compared to rent needs to be $300/month. POSSIBLE, but is it worth $18,000 to live in a house you don't love for 5 years?

Now, if you did C, and rent for 6 months, you'd pay $6,000 in rent (using your worst estimate), and assuming the same $160,000 dream home, $9,000 in closing costs, for a total of $15,000. If you rent even shorter term, say 3 months, then its down to $12,000. Of course, it might take 9 months, and then you're back to $18,000 again, but you're in your dream home.

Buying a house short term NEVER makes sense unless you get a steal on it, and you can flip it for enough to make up the closing and make a profit. In this market, SELLING is the big if. Buying right now is a steal, but flipping is a death trap.

5 years is right on the edge of long term, so ... meh maybe, but 5 years in a house you don't love? No thanks.

And with the real estate market, right now, with all the deals out there, lets say you spend 6 months renting, and so you've got $44,000 left to use to buy with. If you can get what you're dreaming of in the area you're going for say $160,000, then you can put down $32,000 down, pay cash for the $9,600 closing costs, and have about $2,000 left over.

Without knowing the local market (ie: where are you moving to?) its tough to be specific. But generally, renting in the short term is cheaper than buying in the short term.

**PrairieRose** · 06-27-2008, 08:27 AM

Also don't forget that you've only got so long to reinvest your 'house money' before you have to pay taxes on it (or once per lifetime you can side step it). In our state you have to live in a house or rather own it for 3 years before you don't have to pay capital gains taxes on it when you sell it, so there's a consideration too. (capital gains is like 30%....ouch!) I'd say find a house you can be comfortable in, reinvest your money, live wisely, saving all that you can for your dream home and then start on it. Jmho.

**blitzen** · 06-27-2008, 08:45 AM

I would rent for at least 6 months to a year in your new destination. Reason being, unless you are very familiar with the area, you may buy in an area you end up not liking. If you rent, at least you get a feel for the neighborhood and your surroundings. You can always buy later once you decide you love it.

**ladykemma2** · 06-27-2008, 08:51 AM

i like option C, but buying, not renting, as long as you can afford it. <25%!

why move twice?

**1bassoon** · 06-27-2008, 11:43 AM

Originally Posted by Greebo

Actually i think C is your better option. You're forgetting a major factor in buying/selling a home. Closing costs. Don't worry, EVERYONE forgets closing costs...

Yep, that would be me. And that's part of our issue right now -we've only been here (B'ham, AL) for 3 years - so a bunch of our equity got eaten in closing costs.

Thanks for the advice - very helpful.

**Greebo** · 06-27-2008, 11:48 AM

I do think the idea of looking for a place before you move has merit, though. You'll need a real estate agent, but if you can tell them what you're looking for, you could, possibly if you find it, for a bit of extra up front work, move from where you are now into your dream home w/ no stop in between.

Where is it you're looking to move to?

**Alidoodle** · 06-27-2008, 02:49 PM

In this real estate market you would be completely crazy to BUY a house unless you plan to live there for 10 years or more. If you want to retire some day, I'd say put your money in a good safe investment...and that does not include real estate. Not only do you have closing costs, but maintenance, upkeep, and property taxes are also something to consider.

**vigilant20** · 06-27-2008, 04:10 PM

I would personally go for a home now. The houses I have been looking at are undervalued by about 25%. When the market picks up the home would sell for considerably more than what you paid for it. Banks are also desperate for business...I currently have pre-approval on a low fixed interested, 0 down, 0 closing cost loan.

**itlw8** · 06-27-2008, 04:25 PM

I personally would buy but I would make sure it is within my means or below..... IF you choose to rent I would not rent big I would rent no bigger than that house you wanted to buy the goal is to get to know the area and save for a bigger down payment...

Once the kids move out a smaller house may be all you need.

**lisettelovebug** · 06-28-2008, 01:49 AM

Originally Posted by 1bassoon

Looking for some impartial feedback:

My dh and I have lived beyond our means for quite some time now - with 5 kids and one income, not too hard. We have a chance to start over: selling house, moving to new state.

We should come out of the house sale debt-free (!!) with 50K in the bank. Right now, we have no savings and very minimal retirement.

Advice on the following options?

A) Buy a cheapo, small (1600sf) home, put 20% down and the mortgage would be less than rent. Sell it in the spring, and look for our "dream" home - on 2-3 acres.

B) Buy a cheapo, small (1600sf) home, put 20% down, pay off the mortgage like crazy for 4-5 years, then buy something bigger. (By then, we'd have only 4 kids at home and looming college bills)

C) Rent a good size home for our family (800-1000K per month) while we look for a home to buy.

C) any other ideas?

I think if we did B), everyone would think we'd gone off the deep end - so that's what Dave would say, right? My personal analysis is that we've gotten into trouble b/c to buy a home that our family fits - and I'm not talking a mansion here - we've had to have a mortgage payment that's 25% of takehome pay. . . . .

Like to hear your thoughts and perspectives - thanks!

Wow,,, 1600 sf is a small home? That's medium around here. we're looking for a house right now and this is about the size we;re looking at (we're a family of 5). The good thing about this size house compared to a larger one is that heating / cooling is going to be less. Have you thought about buying this size home on 2-3 acres. You can always add on. Or maybe if there is an unfinished basement that can be done later. You're going to pay a lot less for a smaller home.

You may have trouble finding a place to rent for 800-1000 a month to fit your family. We do and there's only 5 of us. Plus, for 1000 around here you can have a pretty nice home that you can call your own.

One other thing, I believe if you live in a house less than 2 years you have to pay capital gains on it. If you live in it for more than that you're ok up to a certain amount. Another thing is if you sell it next year you're not going to have any equity in it and who's to say that the market won't go down even more. Just a thought.

**CYork** · 07-04-2008, 12:58 AM

Originally Posted by PrairieRose

Also don't forget that you've only got so long to reinvest your 'house money' before you have to pay taxes on it (or once per lifetime you can side step it). In our state you have to live in a house or rather own it for 3 years before you don't have to pay capital gains taxes on it when you sell it, so there's a consideration too. (capital gains is like 30%....ouch!) I'd say find a house you can be comfortable in, reinvest your money, live wisely, saving all that you can for your dream home and then start on it. Jmho.

Actually, several years ago Congress did away with the rules re: needing to reinvest the gains made on the sale of a primary residence in which one has lived for 2 of the previous 5 years. Now, a couple is able to pocket tax free up to $500,000 of capital gains from the sale of a primary, personal residence as long as they've met the time restrictions for living in the home.

Also, the cap for long-term capital gains (those held for at least 1 year and a day) is now 15%. (If Obama has his way, this will almost double to a rate of 28%!)

**hmabbott** · 07-04-2008, 07:38 AM

I'm finding this thread VERY helpful, as we're in a similar boat. I think we're leaning toward buying with a total cost of land and housing for less than $20K. If we're careful, it's very doable in our area. That would make our mortgage 1/2 of our rent and only finance it for less than 5 years. Build onto the house on a cash basis after it's paid for. But we're not looking to resell anything we buy at this time, so it's long term for us.
Thanks again for posting this!

**Greebo** · 07-04-2008, 09:15 AM

Originally Posted by hmabbott

I'm finding this thread VERY helpful, as we're in a similar boat. I think we're leaning toward buying with a total cost of land and housing for less than $20K. If we're careful, it's very doable in our area. That would make our mortgage 1/2 of our rent and only finance it for less than 5 years. Build onto the house on a cash basis after it's paid for. But we're not looking to resell anything we buy at this time, so it's long term for us.
Thanks again for posting this!

Make sure you factor in taxes and insurance, and possibly PMI if you borrow more than 80% of the value of the house.

But in your situation, I'd jump on buying too, since its long term.