Rent vs Buy but a unique situation

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yz113
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Rent vs Buy but a unique situation

Post by yz113 »

DH and I moved to a small metro (300K population) a few months ago. We have 2 kids who go to private elementary. I am a physician and husband works in tech. DH works from home. We intend to live in this area for at least 4 years for contractual reasons. I work for a private practice but most likely looks like we will merge into the hospital system here. So there will be some changes in the practice.

Our salary will be around ~800k this year and will increase in the next few years.
Our Investments:
HYSA: 100k
401k: 320k (index funds)
Post tax stocks (mostly FAANG): 650k
529's: 165k

Debt: 0 (no medical school debt, cars paid off)

The conventional wisdom for us is to rent till we scope out the area, figure out the good neighborhoods. Now the whole issue is there were fires this year and there is a huge housing shortage. There are not a lot of houses for rent in good/decent areas. Apartments/townhomes inventory is also tight. But we did find a decent house (2k sqft) for a month-month rent for 2k/month. We wanted to do a full 1 year lease for stability but the landlord insisted he would only do a month-month. We just rented this house since nothing else was available during our timeframe. There are definitely more houses to buy than rent. Now with this situation should we aggressively searching to buy. With young kids we dont want to be moving to undesirable parts of the city.

The real estate market for buying seems to be inflated like everywhere else. The $/sqFt is at 2007 levels in this area and it took around 14 years to reach back to 2007 levels. So if we buy now and lets say we move out in 4-5 years we will be most likely selling this house at a loss. We have tried different rent vs buy calculators and current rental (rent @ 2k, house estimated at 450k, property taxes at 0.5%) seems to be a good deal. But I do not have the stability since we dont have any long term commitment from the owner.

Another question we are thinking about: should we buy a starter home like the home we are staying in (about 450k) or a forever home (900k). The median income in the zip code is $55k but a lot of retirees moving in from out of state. Would we have problems selling our "forever" house in the future when the median income is low. But whats surprising is the 900k houses are getting sold in 20-30 days now.

Any thoughts/comments/suggestions?
HomeStretch
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Re: Rent vs Buy but a unique situation

Post by HomeStretch »

From a financial perspective, you can afford whatever you want from a housing perspective.

As a family with children and two working parents, you likely have a busy life. Given your high income and low expense run rate in a MCOL area (per your other thread), consider buying or renting the home that will make your family happiest and safest while being convenient to work and school(s).
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Lee_WSP
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Re: Rent vs Buy but a unique situation

Post by Lee_WSP »

The rent vs buy decision is only a decision if you have options. It doesn't sound like you have a lot of options.
Katietsu
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Re: Rent vs Buy but a unique situation

Post by Katietsu »

Since you have the income and financial stability to support any of your options, this would be personal choice.

Assume that you bought a $900,000 house but then wanted to move in a few years. Based on your description of your local market, it sounds like a huge drop in prices would not be expected. But, assume that you did “lose” $200,000 between a drop in prices and transaction cost. You would still be OK and could view it as an extra cost of living in a more desirable home for X years.

I think looking around for a 2000 sq ft home more similar to your current rental makes a lot of sense. When you might want to move in 4 years, I would want a home that people with more typical incomes would consider buying. With the right home, you might find that you like the “starter home.” I know several people who thought they were buying their starter home 30 years ago before realizing it was all they needed. The less expensive home would also mean flexibility. Maybe you decide to work 4 days a week instead of 5 or a unexpected swing in the job market leaves your spouse unemployed for six months. Whatever the situation, the feeling that you can pay your mortgage even you are not both killing it at work, is very valuable, IMO.
Topic Author
yz113
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Re: Rent vs Buy but a unique situation

Post by yz113 »

Katietsu wrote: Mon Aug 02, 2021 12:36 pm Since you have the income and financial stability to support any of your options, this would be personal choice.

Assume that you bought a $900,000 house but then wanted to move in a few years. Based on your description of your local market, it sounds like a huge drop in prices would not be expected. But, assume that you did “lose” $200,000 between a drop in prices and transaction cost. You would still be OK and could view it as an extra cost of living in a more desirable home for X years.

I think looking around for a 2000 sq ft home more similar to your current rental makes a lot of sense. When you might want to move in 4 years, I would want a home that people with more typical incomes would consider buying. With the right home, you might find that you like the “starter home.” I know several people who thought they were buying their starter home 30 years ago before realizing it was all they needed. The less expensive home would also mean flexibility. Maybe you decide to work 4 days a week instead of 5 or a unexpected swing in the job market leaves your spouse unemployed for six months. Whatever the situation, the feeling that you can pay your mortgage even you are not both killing it at work, is very valuable, IMO.
Buying a starter home makes most sense from a financial perspective. Also the home we are renting checks all the boxes we need.
MoonOrb
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Re: Rent vs Buy but a unique situation

Post by MoonOrb »

I personally would not want to buy a home unless I thought the likelihood of staying there for many years would be high. It's a lot of hassle and time and energy that I'd spend elsewhere. Here it looks like the wild card is you feel insecure because the landlord isn't offering an annual lease. I would probably just ride this out with the landlord and cross the bridge of needing to move when you come to it. Right now you have a place that meets your needs and you're not excited about buying. Don't buy.

On the other hand, you have the financial means and the flexibility with your lease to move quickly on anything desirable that does come up, so you might as well pay attention to whatever properties are listed in case something does come along that excites you.

In my opinion, one of the things that money buys you is convenience and options and you have so much money that you can just deal with whatever situation comes up when it comes up. So what if you overpay on a house when the overpayment is worth a fraction of what you make in a year or two.
Last edited by MoonOrb on Mon Aug 02, 2021 3:52 pm, edited 1 time in total.
TheHiker
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Re: Rent vs Buy but a unique situation

Post by TheHiker »

The housing market is inflated. The same is true for your FAANG stocks.
When/if housing prices go down, chances are so will your investment portfolio. I would at least diversify the stocks.
900K house is ~1x of your gross income so you, of course, can afford it.
I would not, however, buy more house than needed. You will pay more in property taxes and, likely, maintenance. It may be more difficult and expensive to sell than a starter house. Also your idea of "forever" house may change over the years.

Another question to consider. Is your 800K income stable or it it contingent on things like RSU income (I suppose the tech income may be)? If it is, I would look at the average income for the past few years rather than just last year. In our case there is a huge difference and I consider my current high tech income more or less an aberration.
niceguy7376
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Re: Rent vs Buy but a unique situation

Post by niceguy7376 »

I would try to find a long term lease rental than this month to month.
sls239
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Re: Rent vs Buy but a unique situation

Post by sls239 »

Did the landlord explain why they only want to do month-to-month?
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Watty
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Re: Rent vs Buy but a unique situation

Post by Watty »

yz113 wrote: Sat Jul 24, 2021 10:09 am We wanted to do a full 1 year lease for stability but the landlord insisted he would only do a month-month.
That could mean that something is going on like the landlord is thinking of selling it in January when the sale would be on next years taxes.

yz113 wrote: Sat Jul 24, 2021 10:09 am Post tax stocks (mostly FAANG): 650k
.....

should we buy a starter home like the home we are staying in (about 450k) or a forever home (900k).


Any thoughts/comments/suggestions?
There is a lot of space between $450K and $900K.

If I was in your situation I would look at selling most of the FAANG stock and buying a house for something like $650K that is several notches above "starter home".

I would buy it with a 30 year mortgage and make a large enough down payment so that your mortgage payment is reasonable so that you could have positive cash flow if you need to keep it as a rental if you cannot easily sell it when you move.

Right now the FAANG stock is around 65% of your investments excluding the 529. The index funds that you own likely also own a significant amount of that stock.

Unless you could save a lot in taxes by waiting a few months for the gains to become long term then I would sell at least half of it now regardless of the taxes just for diversification.
Topic Author
yz113
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Re: Rent vs Buy but a unique situation

Post by yz113 »

TheHiker wrote: Mon Aug 02, 2021 3:04 pm The housing market is inflated. The same is true for your FAANG stocks.
When/if housing prices go down, chances are so will your investment portfolio. I would at least diversify the stocks.
900K house is ~1x of your gross income so you, of course, can afford it.
I would not, however, buy more house than needed. You will pay more in property taxes and, likely, maintenance. It may be more difficult and expensive to sell than a starter house. Also your idea of "forever" house may change over the years.

Another question to consider. Is your 800K income stable or it it contingent on things like RSU income (I suppose the tech income may be)? If it is, I would look at the average income for the past few years rather than just last year. In our case there is a huge difference and I consider my current high tech income more or less an aberration.
DH works in tech. We also think the stock is inflated. DH's unvested RSU's for the next 4 years has been already been depreciated 15% in the salary calculation. My income is only going to go up once I become partner and be paid on productivity after 2 years.

My other concern is the median income in the zip code here is 55k. But there also a lot of retirees here moving from VHCOL and they probably have high net worth. From a financial perspective would it make sense to buy a house 15x the median income.
Topic Author
yz113
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Re: Rent vs Buy but a unique situation

Post by yz113 »

sls239 wrote: Mon Aug 02, 2021 3:47 pm Did the landlord explain why they only want to do month-to-month?
I dont think the landlord is planning to sell the house. The landlord is a 85 year old widowed lady and she primarily bought this house to stay closer to her children if the need arises. One of her children stays a couple of blocks over.
TheHiker
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Re: Rent vs Buy but a unique situation

Post by TheHiker »

yz113 wrote: Mon Aug 02, 2021 3:56 pm My other concern is the median income in the zip code here is 55k. But there also a lot of retirees here moving from VHCOL and they probably have high net worth. From a financial perspective would it make sense to buy a house 15x the median income.
IMO if you are buying a "forever" house, then it does not really matter very much.
A house way above the median may appreciate less and may be more difficult to sell or rent out, but if you don't intend to sell any time soon then it does not affect you.
It remains to be seen if there is a long-term trend of people moving from VHCOL areas to LCOL/MCOL and driving the prices up.

We live in a VHCOL area where starter houses are at 1.5M so from here it looks like you may be overthinking it.
Lars_2013
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Re: Rent vs Buy but a unique situation

Post by Lars_2013 »

yz113 wrote: Sat Jul 24, 2021 10:09 am Another question we are thinking about: should we buy a starter home like the home we are staying in (about 450k) or a forever home (900k). The median income in the zip code is $55k but a lot of retirees moving in from out of state. Would we have problems selling our "forever" house in the future when the median income is low. But whats surprising is the 900k houses are getting sold in 20-30 days now.
20-30 days would be forever in my MCOL real estate market, where (at least as of late June, which is the most recent data I see) the median days from listing to a pending sale was 5.

It sounds like a $450,000, 2000 sq ft home is a typical home in a higher-income part of the city. That's what most people would call a forever home. I wouldn't buy one of the most expensive homes in my metro area (which it sounds like would be the case for a $900,000 home) on the hopes of being able to sell to retirees. Hot areas for retirees can come and go. For example, a few more summers of bad fires / smoke could make some people rethink living in parts of the country.
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Nate79
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Re: Rent vs Buy but a unique situation

Post by Nate79 »

While you can afford the $900k home on your income that is significantly higher than thr average starter home and must be a quite luxury purchase in your city. Your asset level to income is pretty low (and significantly undiversified) so I think it is a little early in your careers to jump all the way to luxury house purchase. I would buy the lower cost home or something slightly better and keep saving as much as possible.
Golf maniac
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Re: Rent vs Buy but a unique situation

Post by Golf maniac »

I would go to the landlord and offer to pay $2,500 per month if she will allow you to sign a 2 year lease. If she refuses, then look for a $450k starter home that meets you needs. Do not but the $900k home now as you may be gone in 4 years.
sls239
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Re: Rent vs Buy but a unique situation

Post by sls239 »

I think you are getting a good deal where you are and financially, the best decision would be to stay there, knowing that you have plenty of resources should an alternative be necessary or become desirable in the future.
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