I currently rent 2b/2ba for 3K a month.
I'm looking at one the lowest priced apartments in my area that is 2bed 1 bath, and the selling price is 565K
I looked at the zillow break down, and on a monthly basis: $1,224 is getting lit on fire via HOA fees, home insurance, and property taxes.
On top of that, with 20% down at a 6% interest rate, my monthly INTEREST is around 2.2K a month. So that means on a monthly basis, 3.2K is getting lit on fire, which is more than my current rent.
My principal payment is roughly 450 a month, which results in a total monthly cost of $3,934
How does this make sense?
how the hell does buying make sense?
byu/blueorangan inRealEstate
Posted by blueorangan
40 Comments
It doesn’t make sense where you live. It is better to rent.
what is your rent in 20 years? – your mortgage will still be $3934.
But owning a house also isnt required or for everyone. Nothing wrong with renting if you are happy with the situation.
It’s cheaper to rent in a lot of areas, especially if you’re not staying long term.
Where is that? Even NYC has cheaper 2 bedroom apartments around
say it’s like $600k for a 2b/2ba. That’s $600k/3000/12 = 16.66 price to annual rent ratio. That’s honestly not even that bad. It’s ideal to buy below a 15x ratio, but in plenty of places it’s over 20x.
You’re going to build equity in a few years when buying and if home prices continue to go up then you get more from that, plus you don’t have the risk of your rent being increased by like 3-5% every year or whatever they can raise it at your apartment. So yes you’re paying $3000/month now, but in 5 years it could be $3500/month. Hell if they can raise rent 5% a year it could go up to $3800/month in 5 years.
Expect to have to live in a house/apt for like 5+ years for it to make sense.
It doesn’t always make sense. The people who tell you buying always makes sense are people who bought during particular times in particular places, where conditions enormously benefited them.
If you had bought in 2006 almost anywhere, that would have been a huge mistake. But if you managed to buy before 2004 or from 2010-2020, those were golden years when mortgages were practically free (2010s) or pay was extremely high relative to home value (pre-2004).
And that’s beside the personal stuff. You see it all the time on here where people buy something and turn around and try to sell it 18 months later because they “don’t like the area,” or “got an AMAZING career opportunity.” Those are people who believe it is literally impossible to make a mistake in buying a property. They’re wrong, and they pay tens of thousands for the privilege of learning that.
You’re currently lighting $3000 a month on fire. lighting $3200 a month on fire instead is pretty insignificant.
I think about it this way, when you buy your first property you’re paying into your housing fund that carries with you your entire life. That money you pay every month (well at least the principle) stays with you as you move. If you rent, 100% of that will go to someone else.
Also right now is not a bad time to buy. It’s all relative. When interest rates go down, prices will sky rocket. Everyone will then regret not buying sooner because they could have just refinanced when rates went down.
A lot of buyers in areas like this, are bringing equity from prior sales, so the payments are not based on 20% down, likely much higher. It may not make sense for you, but obviously it makes sense for others. The market prices in that area are not supported by first time or minimal down buyers. Reddit always seems to make this assumption, and it’s not true, or, as you state, it would not make sense. That’s the flaw in your logic.
Also, not everyone considers rent vs buy to be only about the math. If the delta isn’t $3.2K a month, but half that, a lot of buyers might be good with this. Buying is stability for a family, especially if you have kids in school. Rents go up, and you might have to move, and you usually end up with crappy quality of properties compared to what you can buy. You get the cheapest finishes and appliances. Not everyone is a poor wage slave, plenty of people can afford and are willing to pay for nicer things. Look at the cars on the road. You probably think driving a BMW is lighting money on fire because you could drive a Toyota, but the BMW drivers think it’s worth it.
I don’t think people should buy a house solely on the numbers involved. If you are buying for the quality of life and you want to stay in an area long term, the appreciation and numbers historically will work out in your favor. But IMO that’s not the best reason to buy.
Heh, NYC? You sound like you’re in a similar situation as my wife and I.. in our hood that kind of place only makes sense if you have the cash to avoid the loan interest (and many moving to the area do- or their parents do). Our place came with a 15 year tax abetment and our maintenance is only around $500 a month which is below average probably because it’s a condo not a co-op. Without those factors we wouldn’t be able to afford to buy. Btw in 7 years of being here the price hasn’t gone up at all but COVID was in the middle of that.
I bought my house 20 years ago; and put 25% down. My mortgage payment is $1,485. My house can be rented today for $4,000 /mo.
You need to factor in appreciation of the property. You may be crying about that extra $500 a month now. But in 10 years, that will be a million dollar property and rent will be $6000. Then you will cry about how expensive it is to rent, but that buying a property will cost you $1000 more per month.
Here’s my perspective.
In an apartment, there are costs that are covered in the HOA, such as exterior of the building, that you would typically have to pay yourself if you’re in a SFH. Also, depending on the apartment, you get the amenities such as gym, pool, etc.
Your interest and property taxes are deductible against your taxable income, so there’s some offsets in cost there.
Also, you’re looking at interest costs front loaded. To be expected when you finance a home or car. Your interest costs will go down over time and more will go towards the principal…eventually. Lastly, the money going towards your principal = equity…eventually.
Not saying that buying > renting or renting > buying.
If you’re renting, you can still build equity by investing the difference between renting and owning into the market. You’re just using a different investment vehicle to grow your wealth instead of a home.
You need a bigger down payment for it to make sense.
In that instance it in fact does NOT make sense to own. But if you have an instance where your rent is 2k a month but a mortgage with escrow and no HOA is 1200 a month…then the math may work
In your favor.
In the large town closest to me, you can buy a small 4/2 sfh for $215K. With 20% down, your payment will be under $1400/month, no HOA.
A 2/1 apartment rents for $1600.
Buying makes sense.
You need to consider the property appreciation and any tax advantages that you might have to get the full equation.
However, based on market trends, not every market makes sense to own in. Most likely (hopefully for the owner) the landlord purchased that property for much less than $565k so that they are cash flowing.
Now do the same calculation in a market where the property is $250k and the rent is $3000. It’s a completely different scenario.
You can refinance later. Getting your foot in the door is the most importing thing mostly.
You’re right. Where you are, and in many major metros, it is currently cheaper to rent than it is to buy, but there is a hitch. I own rentals and guess what’s happening? Rents are going up even when the sales market is softening. People still have to have places to live and if renting is cheaper than buying, well then the demand for more rentals is going to drive the prices up.
So today, you may be living in a rental with lower costs, but will you be in 3, 5, or 10 years?
Probably not. In the last 50 years of tracking, there has only been 1 year where the average national rental prices have actually dropped.
Keep a careful eye on that balance between renting and owning.
You are doing the math mostly right. The $3.2k/month in Insurance, Taxes, HOA dues, and Interest is cash you never get back, but the $450/month in principal is yours to keep as it is paying off the mortgage on the property.
By this math, your total net cost would be $3,484/month. $500/month is a lot over your current rent, but if rates drop to 5% (which is looking likely), your interest drops by over $300/month to start and suddenly things are beginning to look a lot more attractive.
There are still more complexities to consider:
There is also opportunity costs associated with the down payment. If you invested that 20% ($113k) in even T-bills at 4%, you’d be earning about $375/month, so if you really have that $113k invested now, you need to add that to your total net cost as you would no longer be earning that if you liquidate it to make the down payment. That makes the math $3,799/month to buy vs renting.
Then there’s maintenance. Right now if the dishwasher dies or the sewer backs up, it’s not your responsibility to fix and in most leases it will cost you nothing but a call to the landlord to get it fixed. While renting, you never have to worry that the HVAC will cost you $10k to replace. These are things to consider before leaping from renting to owning.
Apart from the other comments. Owners can join the HOA board. Tenants typically cannot.
Rent in our area is $2500-3500 for our size house.
We pay $2200 a month.
Prices right now, are at one of the two highest levels of un affordability, in 100 years, the other being 1981, when rates were far higher. People are betting on future appreciation, but prices are dropping in 14 metro markets already. I would wait.
Buying a Condo gives you equity but it only makes sense if the monthly payment is only a small amount above rent for the same type of apt and HOA fees are limited by the bylaws. The HOA bylaws should require 2/3 of owners to signoff to amend. Those not voting should count as a no vote on bylaw changes.
A condo needs a HOA to maintain shared apt walls, roofs etc. An HOA is another set of taxes(labeled fees) and rules. Its best to buy a home that doesn’t have an HOA.
In some places that is not possible to have an HOA free home.
If you’re financing most of the purchase price, current home prices only make financial sense in a world of -3% interest rates. That’s why very little is selling that isn’t either a cash sale or a sale to a buyer with at least 50% down.
That’s the math I’m getting in my HCOL. Break-even is 30 years out. Actually sold and switched to renting this year to maximize cash flow and free up cash flow to invest more.
Part of the American dream or was getting your house paid off. Somehow buying a
house then a boat get credit card debt take the equity in your house. Get a new loan to pay off all that stuff. Keep doing what you’re doing again and again and never pay off your house.
Short term rent is always better that makes for a bad retirement plan
You should get tax return from property tax. Also you have an asset. You sell you get money back. You rent that money is forever gone.
In 2009 I was renting a 2bd 2bth apartment for $1200/mo. I bought a house for $194k, my mortgage was 6.5% and $1650/mo. Everyone told me I was crazy for buying a house that made my monthly payments more than renting.
in 2013 we refinanced to a 15 year loan at 2.75%. New payment was $1550/mo. Then during covid we took the 3 month mortgage pause. a year later our loan was modified to 2.75% 40 years, our new monthly payment is $750/mo.
The apartment I had in 2009 is now $2400/mo.
OP forgot to account for maintenance of the home. But yeah, even with those numbers, people were hoping for 20%+ appreciation to make it a net positive. Some were even thinking 50%.
The right answer is that there is no right answer. Everyone’s situation and preferences are different, and there’s too many intangibles and unknown outcomes on both sides of the fence to know for sure.
You just have to do the best you can with the info you have at the time, and be prepared to adjust course if the worst case scenario happens.
It often does not make sense.
“Lit on fire” as if the entirety of your $3k rent isn’t getting “lit on fire” every month.
It depends where you are. In some housing markets it makes more sense to rent, in others to buy.
It’s doesn’t in most H/VHCOL areas….
The delta right now in Boston for a median home is about $2500 cheaper to rent than buy on your all in baseline monthly costs
Over the long term it makes financial sense to buy a home. Rent will increase, likely double in ~25 years. Your mortgage principal and interest are fixed. The home value will increase, probably a similar amount. So in a high cost area the break even might be 7-10 years between renting and buying when you factor this in.
Over the really long term it’s obvious. After 30 years the mortgage would be paid off, just property tax and insurance will be far less than rent. Most places give homeowners lower property taxes, you might pay half as much in property tax as a new neighbor. In the medium term you might be able to refi, lowering your mortgage interest. If you need more space like a 3 bedroom the market can favor moving to the suburbs and buying, renting is more favorable in very high cost areas.
There are non financial considerations. If you rent your landlord could just end the lease or sell the home, you could be forced to move. If you own you can make other permanent changes or important decisions. Like installing an EV charger, fewer issues with pets. In a condo you can vote or be part of the board that decides how the building is managed.
In the short term though rent is a great deal though. It’s cheaper out of pocket. On top of the costs you listed commissions and closing costs add up if you would buy then sell soon after. You aren’t responsible for maintenance, you can move easily.
The difference is when you buy you own it. When you rent you own nothing.
Because in 10+ years, your mortgage would still be the same, while rent will probably have gone up 50%.
Granted, property taxes and insurance grow too, but those are also contributors to your rent increases. There’s no escaping those.
It’s a long term game. Ten years from now, rents will probably be a lot higher. A fixed rate mortgage is an inflation hedge – though taxes, insurance, and HOA fees will continue to rise. Plus, you build equity that can be rolled into your next home.
But none of these things will pay off if you are just keeping the property for a few years.
Genetically you may just be a renter. Lots of nice people are born renters.