If you are single or do not have a huge family, think about renting instead of buying a house. You might be thinking if mortgages rates are so low why am I even renting? Yeah, you could buy a house with a really low mortgage rate, but have you considered the real cost of owning a house?
The biggest cost of owning a house is the property tax. The actual cost of this tax will vary on what state and county you are located in. In Texas, the property tax can be very high- up to 3-4% of your home’s value. Let me give you an example of how property tax can cost you a lot. If you buy a house that costs $100k, first it won’t be a very big house and second you will end up paying around $3,000-$4,000 in taxes each year. This averages out to $290 a month in real estate taxes. Currently I am paying only $600 in rent, so if I bought a house for $100k I would be paying at least half the cost of my current rent in property taxes. If you do not mind paying property taxes there are still plenty of other costs that you may run into.
First, your mortgage lender will most likely ask you to carry home owner’s insurance. That costs around $1000 a year. Then we get into the topic of what if something breaks in your house? What if your foundation is cracked? Or your HVAC system breaks? My parents own a home and their HVAC system broke (after 10 years) and it cost around $5,000 to replace it. That is a lot of money. You might be thinking that your HVAC will not break. But even so, the small costs of home ownership can add up.
If you become a home owner you have to become more responsible; replacing air filters, mowing the lawn, and fixing random things that break. Are you ready to do that? Are you handy enough? Can you sleep at night knowing all the potential responsibly you could have? You really have to consider everything before you buy a house. You might be thinking that these costs will be offset by the investment of the house itself. You might be right, but there is an easier way to invest in the real estate market without buying a house.
If you are thinking about buying a home as an investment or rental property, you should look into REITS. ( Real Estate Investment Trusts) They basically are stock of real estate companies that own a lot of properties. This way you can make money by dividends, and also have your money diversified. Not to mention, buying REITS are a whole lot cheaper than buying a home. I can cover REITS in another post.
What do you guys think about buying a home?
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All real estate is local and temporal, which means that in some places and at some times, it is better to rent than to buy, and sometimes it is better to buy than rent.
The biggest cost of owning a house is the property tax, and sometimes that property tax is a lot higher on a rental property than on the same house owner-occupied. Property taxes on rental property are worst in Louisiana and Michigan, so I wouldn’t want to rent there.
Another cost of owning often forgotten is the private mortgage insurance (PMI) lenders require of borrowers without 20% down payment or equity in their home. Best to save up as fast as you can and to put 20% down when you buy, this almost always beats renting.
“Best to save up as fast as you can and to put 20% down when you buy, this almost always beats renting.”
Always beat renting? Care to explain in more detail?
I disagree. I think that single people that can afford houses should buy houses ASAP, especially considering the all time low interest rates. I saw an article that PMI adds about a percentage to the APR Rate, which isn’t bad at all. Waiting 5 years to save a 20% downpayment, but having to pay 10% interest if the rates go up will cost much more long term (not including rent money down the drain)
Single working people should rent rooms in those rooms to friends (or craigslist tenants of similar age) for rates comparable (or less) than the friends would pay for apartments. That would cover most of the mortgage, if not all of it (depending on the number of rooms).
Yes, you have to pay taxes, and maintenance, etc… but you are also building equity in your home while you pay it off. At least you have SOMETHING to show for your thousands of dollars of housing costs. Unless you have an ARM, your mortgage will always stay the same, whereas rents can increase annually with inflation and due to other factors (like property taxes).
For couples who are both working, its also a no brainer to get a house.
The problem with saving 20% down is that most of people don’t have the will power to do that (myself included). I moved into my house with no down payment with a VHDA loan (A special Virginia FHA loan), and will be having a renter on my lower level in the next few months that will cover Almost 2/3rds (63%) of my mortgage. As long as you dont buy TOO MUCH house, and run the numbers based on the realistic rental income, it almost always makes sense to buy.
I appreciate the response. However, I still stand firmly behind the belief that you should not buy a house when you do not have a family.
Where are you getting the 10% interest at? Since when did people pay 10% on their mortgages? And have you checked how much the treasury bonds are going for? Almost 0%, there’s no way in the near future we will experience even close to 10% mortgage rates. Albeit, there are situations in where you might get really screwy rate because you do not have any credit, but in those situations you should not being buying a house in the first place.
Also, have you ever thought about investing your money elsewhere instead of trying to build equity in your house? I only pay $600 a month in rent, what kind of house do you think you can get with that kind of mortgage payment? Would you even consider that type of house as an investment?
Besides, what if you get fired or you relocate to a new job? What is going to happen to your house? How much principle do you think you’ll have after a few years?
Those are all realistic questions one must consider before buying a house.
I guess it depends where in the country you are.
Its harder to save 20% of $400k (normal price where I live, which I admit is way above the norm) than 20% of 100K. Depending on a person’s income, they could take 10 or 15 years to save 80k (and they couldn’t afford any major life catastrophes). If you pay $600 rent for 10 years, thats 72k down the drain, that you would never get back. 72k that could have been put in a house. The numbers get more dramatic when someone pays $1500 per month (pretty normal in northern va). Over 10 years thats $180k, wasted.
But like i said, it depends where you live. In Rochester, NY, you can buy single family house or two unit apt building for $30-$40k, with a $300-$400 per month mortgage (after 6k, 20% down)
Of course there are extreme people who can save 80k in 3 or 4 years because they live on ramen and peanut butter, but not everyone has that focus.
If you are relocated, you rent your house to people who are too worried about buying. If you buy your house at these historically low interest rates, rent and mortgages should be pretty comparable. if you lock in a low mortgage, when rent prices go up, your monthly cashflow goes up. This strongly depends on rental demand in your area (high in mine). Once the mortgage is paid off (15 or 30 years down the road, much less if you make extra payments), the rent is just money in your pocket.
Buying isn’t for everyone, but I’d rather buy low and sell high than rent and wait for better days (if you can afford it). When you rent, you pay someone else’s mortgage. Not many single people can afford a large mortgage alone, but they can if they have a few friends move in and rent the rooms.
The thing about buying a house with a mortgage is, the monthly payments you make do not all go into the equity of the house. If you take a $80,000 mortgage out at a 5% APR, you will be paying close to $4,000 in interest your first year. This is assuming you are making monthly payments. And at the end of the year you will have only $1,000 equity in your house.
Additionally, based on what you said about Private Mortgage Insurance adding 1% to your APR, you would be paying almost $3,500 a year in insurance on an $80,000 mortgage. Then you have to pay 1-3% of your property value in taxes. So if you bought a 100k house and put 20k down, you would end up paying close to $10,000 (4,000 interest + 3,000 insurance + 3,000 property tax) a year, and only gain $1,000 in home equity.
Finally, renting is not easy, especially if you live long distance. What if a pipe breaks or the foundation is messed up? Can you afford to go back and look at it? Furthermore, if you buy a cheap house you will be screening a lot more shady tenants that might break your house.
You make many good points that I agree with to a certain extent. I don’t think people should pay mortgages by themselves. Especially single people. The smartest thing to do is buy a house with enough rooms, and rent the rooms to friends. If single people are worried about maintenance, they can get a 3 bedroom condos and rent 2 of the rooms (covering most of your mortgage).
I do agree that renting your home from a distance is not easy, but many people do it.
Thanks Gabe for your responses. I hope our discussion on this topic will help more people make the right decision on whether to rent or buy a home.