Rent vs. Buy Advice

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Topic Author
davy88
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Rent vs. Buy Advice

Post by davy88 »

I'm looking for advice on a decision to rent vs. buy in a LCOL area. My family of 4 is moving in the near future to an area near Trenton, NJ, where the cost of living is pretty cheap. I've normally heard that it's not great to buy if you'll be there for less than 5 years, and I expect we'll only be there for 2-3. The main reason I'm considering it is that I think that we could pay cash for the house, and I wanted to see how much of a factor that should be in the buy vs. rent decision? Some estimated numbers:

Buy:
$150,000 house
Property tax $5000/year
Insurance $1000/year

Rent (annual estimates):
$18,000 rent and rental insurance roughly $1500/month

I won't include utilities since I'm assuming we'll pay those either way. Repairs and Maintenance will depend on the house but could be higher than normal homes since it's an area with older homes??? Am I missing anything obvious? My intent would be that we'd live there for at least 2 years to avoid the capital gains tax upon selling, if it looked like there would be a gain. When we moved companies last time for my wife's job, we had selling costs covered in her contract if we wanted to sell our old house. No guarantee that this will happen again, so I'm not banking on it, but it's possible if she continues to work for large corporations.

Thanks in advance for input.
GeoffD
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Re: Rent vs. Buy Advice

Post by GeoffD »

The only reason you would buy in those circumstances is if the town with the best public school system in that area has no rental properties.
daheld
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Re: Rent vs. Buy Advice

Post by daheld »

There's no way I'd buy in this situation. If the AC goes out in the home you buy, are you interested in taking the $12,000 hit to replace it? There's no need to take that risk for a place you're looking at staying two years. Between moving, cleaning, and decorating, took us over a year to feel like we were even settled in to our new home. There is zero guarantee you get what you paid for the home when you move.

Also, $1500/month for rental insurance? I think that has to be a typo, right? I've always paid a couple hundred bucks per year.
Jags4186
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Re: Rent vs. Buy Advice

Post by Jags4186 »

I think you’re crazy to buy in that situation.
Jags4186
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Re: Rent vs. Buy Advice

Post by Jags4186 »

daheld wrote: Fri Feb 21, 2020 8:34 am There's no way I'd buy in this situation. If the AC goes out in the home you buy, are you interested in taking the $12,000 hit to replace it? There's no need to take that risk for a place you're looking at staying two years. Between moving, cleaning, and decorating, took us over a year to feel like we were even settled in to our new home. There is zero guarantee you get what you paid for the home when you move.

Also, $1500/month for rental insurance? I think that has to be a typo, right? I've always paid a couple hundred bucks per year.
I think he meant $1500/mo total for rent and insurance :happy
student
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Re: Rent vs. Buy Advice

Post by student »

If you are only going to be there 2-3 years, forget buying.
daheld
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Location: Midwest US

Re: Rent vs. Buy Advice

Post by daheld »

Jags4186 wrote: Fri Feb 21, 2020 8:36 am
daheld wrote: Fri Feb 21, 2020 8:34 am There's no way I'd buy in this situation. If the AC goes out in the home you buy, are you interested in taking the $12,000 hit to replace it? There's no need to take that risk for a place you're looking at staying two years. Between moving, cleaning, and decorating, took us over a year to feel like we were even settled in to our new home. There is zero guarantee you get what you paid for the home when you move.

Also, $1500/month for rental insurance? I think that has to be a typo, right? I've always paid a couple hundred bucks per year.
I think he meant $1500/mo total for rent and insurance :happy
That makes much more sense. Mea culpa. Now that I've finished my coffee I am prepared to fully participate.
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Watty
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Re: Rent vs. Buy Advice

Post by Watty »

One huge risk if you buy is that when you move you may not be able to sell it at a reasonable price. In a slowing housing market it is not uncommon for a house to be for sale for 6 months or more or not sell. In some housing markets it may not sell at all unless the price is reduced to the level of distressed sales like foreclosures and homes being sold to settle an estate.

I can only see buying make sense if you want to keep it as a long term rental investment, in that case getting a mortage would likely make sense.
Topic Author
davy88
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Re: Rent vs. Buy Advice

Post by davy88 »

Fair enough, I appreciate the overwhelming agreement in the responses here, since I'm just starting to consider options.

If a house was $150k in this circumstance and you were staying for 3 years, how high would the rent need to be before you'd consider buying instead?

I'm not trying to talk myself into any stupid decisions, so please continue shooting this idea down if it still sounds stupid. It sounds as if the general consensus here is that it's stupid to buy for 2-3 years, regardless of the dollars and cents involved, unless the gap is massive. There were a few reasons I was interested in buying instead, and they may still not even be close to enough to justify buying:

1. The houses in the $150k range were in a neighborhood where I could only find rentals in the $1500 range on Craigslist, which can sometimes be sketchy or spam. When I looked at zillow rentals the comparables were closer to $1700/month, so maybe that's more realistic.
2. We have a dog, which sometimes adds to rental costs in addition to what's above.
3. I work remotely so I occasionally watch dogs through Rover just for fun. It's probably only worth about $200/month, but it's a little more difficult to do in another person's home.
vested1
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Re: Rent vs. Buy Advice

Post by vested1 »

I assume your estimate of 18k is combined rent and renter's insurance, which isn't clear from what you wrote. For argument's sake let's say that you bought the house and were there for exactly 2 years, although you don't seem sure about even that. The last assumption is that you pay $150,000 cash for the house.

Two year's of property taxes and HO insurance and 6% sales commission in two years adds up to 21k, so now you have 171k into the purchase. If there are any maintenance issues, which is unknowable, that is an additional lost amount, say 2% total for 2 years which is about average, or another 3k, so now you're into it for 174k, 24k over purchase price. In other words, you would have to sell the house for 24k more than you bought it for in two years to break even. Factor in what you could have made investing that 150k for two years, which is also unknowable.

Selling a house after being there for only 2 years isn't worth the stress involved with doing so in my opinion. If the housing market where you buy takes a sudden dip, which is entirely possible, your loss would be permanent.

The 36k you would spend on rent and insurance for two years would also be a lost expense, but at least you wouldn't have to deal with the hassle of selling in a housing market that may be depressed in two years. It's also not insignificant to be able to walk away from a rental if your plans suddenly change, and not be burdened with the need to sell a house when or before you relocate. Way too risky in my opinion.
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Brianmcg321
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Re: Rent vs. Buy Advice

Post by Brianmcg321 »

You never buy if your only going to be there 2-3 years. You would never recoup your closing costs. If housing goes down and you move you may have that house on the market for 2+ years.

Paying cash for a house your only going to be in for a short time makes it even worse.
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as9
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Re: Rent vs. Buy Advice

Post by as9 »

Not to mention there is nowhere in the vicinity of Trenton with houses for $150k that would be considered desirable. The chances of appreciation are slim to none.

Are your kids school age? Going private?
vested1
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Re: Rent vs. Buy Advice

Post by vested1 »

As a side comment, the property tax rate you quoted, 5k yearly on a 150k residence is 3.3%. Ouch! I'd opt to have the landlord pay that bill.
barnaclebob
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Re: Rent vs. Buy Advice

Post by barnaclebob »

I would only buy if I needed the schools, there were no other suitable rentals in the area you need, or you could handle the real estate transactions yourself, AND if having to sell at a 40% or more loss wouldn't ruin you financially. Never know when we are sitting in the summer of 2008 again.
Topic Author
davy88
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Re: Rent vs. Buy Advice

Post by davy88 »

At the time of our move the kids would be 0 and 3, so school districts are less of a factor. There's no major reason we couldn't be there 5-10 years and school would be a factor, but I just don't think we will want to stay there that long (we've lived in central Jersey before). There are worse places to live than NJ, but it's not high on our list when we have no family there.

And yes, to clarify I meant at $1500/month the total combined in rent/renter's insurance would be about $18k. I think it would end up being closer to $1700/month, but yes, that's what I meant originally. And yeah, property tax is absurd in NJ.

Good comments all, half of the value in Bogleheads is talking yourself out of doing anything stupid!
Unladen_Swallow
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Re: Rent vs. Buy Advice

Post by Unladen_Swallow »

I would not buy.
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StewedCarrot
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Re: Rent vs. Buy Advice

Post by StewedCarrot »

Pierre Delecto
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Re: Rent vs. Buy Advice

Post by Pierre Delecto »

I would not buy in New Jersey. I would rent for sure. You might just end up owning something that’s extremely hard to sell. I don’t know the conditions in New Jersey, but I assume it’s similar to Connecticut where people are having a terrible time selling right now.
Lee_WSP
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Re: Rent vs. Buy Advice

Post by Lee_WSP »

It depends on the rate of return of the cost to purchase. At 5.5% ROR, 1,000 a month is equal to buying.

https://michaelbluejay.com/house/rentvsbuy.html

But the home your looking at probably has a much higher maintenance list which should increase the purchase price input into the calculator.
Last edited by Lee_WSP on Sat Feb 22, 2020 1:40 pm, edited 1 time in total.
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JoeRetire
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Re: Rent vs. Buy Advice

Post by JoeRetire »

davy88 wrote: Fri Feb 21, 2020 8:23 amI've normally heard that it's not great to buy if you'll be there for less than 5 years, and I expect we'll only be there for 2-3.
Rent.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Triple digit golfer
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Re: Rent vs. Buy Advice

Post by Triple digit golfer »

Rent, no question for me.
mesaverde
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Re: Rent vs. Buy Advice

Post by mesaverde »

OP, have you ever had to pay for a major repair soon after buying? I have... I had to replace the air system one year after buying, a $7,000 hit.
Even if you didn't have such a repair, it doesn't make any sense (financially or stress wise) to buy in your situation.
"Learn from the past, live in the present, plan for the future"
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