Thursday, November 5, 2009

When is it better to rent?

As I was waking up this morning I was dreaming about giving away everything I owned and just living on whatever God provided for me and my family. It was a radical dream and got me to thinking about the benefits of owning things, real estate in particular, and that led me to thinking about when it would be better to NOT own real estate.

If you go to Karl Jeacle's Mortgage Calculator you will find that most of the first 7 years of payments go towards the interest on the home loan on a 30 year mortgage. If you as a buyer, are buying an older home there are also maintenance costs. People generally end up as caretakers for the banks property during this time. Unless the properties are increasing in value fairly rapidly it may not make sense to buy a home.

I was looking at homes in Ventura County by the ocean, and it's much cheaper to rent than buy. If you want to live by the ocean, Ventura County is beautiful, and has several places that are fairly inexpensive to live as a renter. In fact the rents are $1500-2000/month less than a 30 year mortgage and Mello-Roos would be.

In addition to the direct costs of ownership, there are indirect costs. Certain areas have higher effective tax rates due to local municipal and county bonds. There are also  utility costs to consider. Most landlords pay for some utilities such as trash and water, and others pay for or subsidize some heating costs.

During college, I had an apartment where the landlord (for whom I waited tables) paid for the building hot water. I never turned on the gas; I cooked with a microwave and a hot plate, and Long Beach never go cold enough for me to need anything other than an electric blanket. Not only did I not have the monthly bill, I didn't have to pay $150 for a utility deposit.

The other question is whether or not you want to stay in the area you're in for more than ten years. Unless you're sure you're staying at least that long, you needn't buy unless you are sure you're in a rising real estate market. During the boom of the early 2000's my uncle bought a condo for my cousin to rent. The payments were cheaper than renting, and he made twenty grand by the time my cousin graduated. In a flat or down market, you can probably find an inexpensive rental, even with less-than-perfect credit. If you have good credit you can probably buy a repo for less than rental costs, but you'll need to get estimates on the repair bills, which may drive your costs higher as many repo's are older properties.

You should definitely look into all the costs of ownership before jumping into buying a repo. Freddie Mac has a PDF that gives estimated life expectancies. It would be wise to look at the various appliances in a house and note the dates of manufacture on them, and ask any home inspector what the approximate age of the roof is--though you might be able to find the roof age at City Hall or the Building and Safety or Community Development offices (wherever a contractor or owner has to pull a permit for work.)

To sum up, it may be better to rent until you can save up enough of a down payment to get a 15 or 20 year mortgage.

No comments: