Rent vs. Buying a house (page 4)

benext

My first house was a two family. With the rental income I was only going into my pocket for around $500 a month. I had the house 4 years, sold at a huge profit, and put down a large down payment on a single family. I was only able to afford the first house by taking out a loan on my 401k. The advantage to that was I was paying myself back for the loan. In 2001 the IRS allowed this on a first time purchase with no penalty. If you disturb your IRA then you have the 10% penalty, there is no 20% witholding but the money is counted and taxed as ordinary income.

Simon

Lots of good advice already.

Another thing to think about is that when you buy, you are fixing your monthly payment.

Even if it is a lot, inflation makes it cheaper.

In 10 years time the mortgage payment will still be the same and will (then) seem incredibly cheap. Rents will have risen in the meantime.

Best not to overstretch though. We have a very affordable property and overpay the mortgage so that we should be mortgage-free in a few more years. I know some people go for the other approach and only service the debt with the idea being that the property will be worth a lot in 10-20 years and they can then downsize and pay off the mortgage that way (seems risky to me though and if lots of people plan to do it then the prices may come down as a result, thus causing problems).

So, I'd say buy ... but try and pay it off as fast as possible (it is just a long term loan after all so the quicker you pay it back the more money you save).

Don't look at 'equity' in the house as something to cash in - it's only your house once you have payed it back.

G Money

Here is another thought. Buy rental property. In many areas it may be cheaper to rent. The purchase of a rental property will allow you to gain equity. Also you will not loose your standard deduction. You'll have more write offs and the like with the rental property.
For example, you can write off insurance and you can depreciate a rental property, among other deductions. You also won't be forced to choose between the standard deduction and having to itemize.
The rent will help you make the payments. I've known quite a few people who have purchased 4 unit properties in Texas. Prices are going up but imagine a 4plex for $250,000. With 20% down and a loan of $200,000 you'd have payments of $1297 assuming a 6.75% 30 year fixed rate. Taxes and insurance would run $300 to 350. So the whole monthly package would be $1650 max. Renting each unit for at least $500 you'd take in $2,000. You are ahead of the game $350 or more and after depreciation and a few other tax breaks any increase in taxes would be negligible. You'd also maintain your standard deduction.
Now if you bought the roof over your head, you'd have the payment and nothing to offset it and you'd probably itemize deductions so in essence you'd lose the MFJ or Single standard deduction as you'd itemize instead (mortgage interest makes itemizing better). You'd also be payign out more than you are now. For what result?
I hope I explained myself clearly.
In some areas that are lower cost, if it isn't much more to pay to own than rent then I'd say do it. If you can rent much cheaper than you can own, then perhaps what I outlined above is for you.
Oh and NEVER touch your retirement plan. It is one of the few things to support you when you are old. I've seen people file bankruptcy and keep the accounts and look at OJ, he kept his. You can't turn back the hands of time and re-contribute. Messing with a retirement account almost always ends in trouble. I'm saying be cautious. Many people in financial straights cash out theirs and still are on a downward spiral. I'm not saying you are but just trying to caution you, that's all. Borrowing against funds can be ok if you MAKE SURE you pay back every penny.

SixofNine

Try renting to buy. That way you'll be sure to get screwed coming and going. You still want to be screwed coming and going, don't you?

Purza

You have gotten some good advice. I rented for years and had nothing to show for it. I bought a house four years ago and the property values in my area increased so that I have $200K in equity. Of course that could fall with rising interest rates, but I still have made a profit. I took a loan against my retirement for the closing costs (its a public employee retirement that helps first time home buyers) and I paid that back once I got some equity in the house. Granted, my husband is a handyman and I all have to do is tell him what is wrong, or what I want done and it gets done. If it was just me living on my own, well the repairs would make me freak out. That being said, I bought a brand new house and the repairs are minimal.

Purza

mkr32208

I say keep renting....

Of course I do own rental property...

~mark of the~ will NEVER rent class

daniel-p

Elsewhere,
Take a look at this: http://www.demographia.com/dhi-ix2005q3.pdf

It's a report on international housing affordability and gives corelations on current over/underpriced markets. Be very careful, as many markets in the US are extremely overvalued.

Euphemism

Just a thought: anyone who tells you that buying is always better than renting, but that you shouldn't raid your 401(k) to buy, is contradicting themselves.

After all, a mortgage costs more than rent. If the expected return on a 401(k) is better than on real property, then you're better off renting and putting the savings in a 401(k). If the expected return on real property is better, then it's worthwhile to use money from your 401(k) towards the down-payment.

The correct answer depends on several numbers: the current (and expected future) ratio of rent to mortgage; the expected returns of investing in a 401(k); and (as Odrade mentioned) savings discipline.

In other words, the reason no one can give you a straight answer is because there is no one-size-fits-all answer! The best you can do is create an Excel sheet and run the numbers relevant to your situation.

Just make sure you're actually comparing apples to apples; i.e. the same total monthly expenditure (however distributed between mortgage, rent and investment) and the same quality of residence.

LDH

I can't seem to get a straight answer out of anyone as to whether or not owning a house would be financially better than renting an apartment.

sheesh.....

Other advantages to owning a home include deduction of the interest that you pay on the principal. Also, you can use it to build net worth. When you retire, you can sell and move to a much less populated area and buy a house there. You'll still have money left over.

My advice for young singles? Buy a duplex. Rent the other half out. You'll have more control of the tenant (seeing how you live next door) and they'll be funding your mortgage.

Lisa

LDH

ps, whatever you do, don't get suckered into an ARM ( Adjustable Rate Mortgage) at this point. They only work well for people who have liquid investments and can pay the principal as soon as the interest skyrockets.

Rent vs. Buying a house

Share this