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This isn't a dilemma that we are facing but, given the proliferation of the housing threads on FW and the fact that this a lot of people struggle with this question, I think that a thread dedicated to a discussion of this particular topic may be worthwhile. For the purposes of this discussion people should assume that both houses would be affordable and neither would put a financial strain on the would-be homebuyers.

Ideally, what I'd like to see is a discussion of situations and experiences on both sides of this never ending debate, which, I would hope, would be helpful to others facing these types of decisions.

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Again I dumbed it down, but most of us are only talking about what to do on step 4, nothing to do with 1-3 or 5. I coul... (more)

mikef07 (Feb. 14, 2013 @ 4:48p) |

The key point is that in order for you to truly understand #4 you also should do #2 because if you pick buy big because ... (more)

dshibb (Feb. 14, 2013 @ 4:52p) |

That is solid and makes sense. If you know you are going to need bigger then either buy it or rent smaller until you ca... (more)

mikef07 (Feb. 14, 2013 @ 5:01p) |

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When my boyfriend at the time (husband now) and I decided to buy a house we were debating between these two options. We had the means to buy a three-bedroom or a two-bedroom house, no plans for children in the immediate future. I was leaning toward the smaller more frugal option, he was leaning toward the larger, more spacious option. We ended up buying a very large three-bedroom, much larger than we were looking for, because of the opportunity -- it wasn't in the best of shape and had dropped in price. My "lessons":
1) We enjoyed the house thoroughly, both living in it and renovating it -- we have wonderful memories from the house and our life there.
2) A year later I was told my contract wasn't going to be renewed at work, and we ended up staying in the house only two-years and moving across the country.
3) Oddly enough living in a place that was much bigger (2,500 sq-ft) than we needed taught us we didn't need such a large place. We ended up moving to a 1,000 sq-ft apartment for two-years.
4) We lost money on that place, not much given the market condition -- I am not sure a smaller place would have lost less or the same amount of money.

I highly recommend that as long as it is within your means you need to consider also the quality of life value a place has and not only its financial value. You can't predict the future and planning for a long-term place may never be as long of a term as you think.

Why pay to heat space your not going to use?

Heating, cooling, property taxes, maintenance on more square footage, potentially a bigger yard to maintain, more doors, windows, siding, roofing material that can fail... and on and on.

tennis8363 said:   Heating, cooling, property taxes, maintenance on more square footage, potentially a bigger yard to maintain, more doors, windows, siding, roofing material that can fail... and on and on.I think that there's a fine line between acquiring something that's clearly way beyond your anticipated needs vs. being penny wise but pound foolish and purchasing a house that you are likely to outgrow fairly quickly. The most obvious example of the latter is a couple of newlyweds buying something that is just right or even too much for them but immediately becoming too small once they start having kids.

If you are buying a house that you are likely to stay in for a while, assuming that you can afford it, I think that it makes a lot of sense to look for something that you can grow into, with the obvious caveat that the exact definition of what is reasonable will depend on your particular situation.

Depends. Are you getting a screaming deal on the small house or the big house? We recently bought a house that is large enough for the whole family we're planning, but we only have one child. We did it because the deal was probably 30-40% off FMV.

Maybe you want to explore the not so big house mindset?

Perhaps this is already implied in the subject line, but to me the outcome of the larger vs. smaller house debate isn't all about the square footage. We are currently looking for a new house and, a few weeks ago, looked at a 6,900 square foot house with a 2,100 square foot finished basement. Although the house was very nice, because of the design and the layout it actually didn't feel nearly as large as you'd expect it to feel based on the numbers. At the same time, some 5,000 square foot houses (with 2,000 square foot finished basements) have felt very spacious.

While functional designs can only take you so far, I think that it is very important to focus not just on having the right square footage for you but to also make sure that the house is functional and the layout makes sense.

woowoo2 said:   Why pay to heat space your not going to use?

Just close the vents and doors to those rooms.

geo123 said:   Perhaps this is already implied in the subject line, but to me the outcome of the larger vs. smaller house debate isn't all about the square footage. We are currently looking for a new house and, a few weeks ago, looked at a 6,900 square foot house with a 2,100 square foot finished basement. Although the house was very nice, because of the design and the layout it actually didn't feel nearly as large as you'd expect it to feel based on the numbers. At the same time, some 5,000 square foot houses (with 2,000 square foot finished basements) have felt very spacious.

While functional designs can only take you so far, I think that it is very important to focus not just on having the right square footage for you but to also make sure that the house is functional and the layout makes sense.


Which is why I linked to what I did above... from the NSBH website:

..brings to light a new way of thinking about what makes a place feel like home - characteristics many people desire in their homes and their lives, but haven't known how to verbalize. How big is Not So Big? Not So Big doesn't necessarily mean small. It means not as big as you thought you needed, but designed and built to perfectly suit the way you live.

tennis8363 said:   Heating, cooling, property taxes, maintenance on more square footage, potentially a bigger yard to maintain, more doors, windows, siding, roofing material that can fail... and on and on.This is all true but if you buy a house that's too small for you and then end up having to sell it and buy a new one fairly shortly afterwards, the hassle and the transaction costs will actually make the smaller house a much more expensive endeavor than what the larger house would've been from the outset.

It also depends on what it is that we are talking about. In most areas houses that are too small or don't have the right number of bedrooms don't appreciate all that much and can be very difficult to re-sell. In many areas, for instance, with everything else being equal a 4 bedroom house will appeal to way more homebuyers (which will make it much easier to re-sell) and will appreciate much faster than a 3 bedroom house. In our area, a 2,200 square foot house will also appreciate way slower and will be much more difficult to re-sell than a 3,200 square foot house.

None of it means that every area is the same or that you should overbuy, but these are all important financial considerations that should be taken into account.

Bagofchips said:   geo123 said:   Perhaps this is already implied in the subject line, but to me the outcome of the larger vs. smaller house debate isn't all about the square footage. We are currently looking for a new house and, a few weeks ago, looked at a 6,900 square foot house with a 2,100 square foot finished basement. Although the house was very nice, because of the design and the layout it actually didn't feel nearly as large as you'd expect it to feel based on the numbers. At the same time, some 5,000 square foot houses (with 2,000 square foot finished basements) have felt very spacious.

While functional designs can only take you so far, I think that it is very important to focus not just on having the right square footage for you but to also make sure that the house is functional and the layout makes sense.


Which is why I linked to what I did above... from the NSBH website:

..brings to light a new way of thinking about what makes a place feel like home - characteristics many people desire in their homes and their lives, but haven't known how to verbalize. How big is Not So Big? Not So Big doesn't necessarily mean small. It means not as big as you thought you needed, but designed and built to perfectly suit the way you live.
Right, and I don't think that too many people out there have a conceptual disagreement with any of this. The way that it translates into practice is a totally different question, however.

It's best to rent a place if your housing needs may change in the future.

Many people end up living in a house for a few years and then having to upgrade. This is a waste of resources because the frictional costs associated with buying a home are huge... closing costs, realtor fees, inspections, etc. It only makes sense to buy a house if you will live there 7 years or longer.

The people that buy a house bigger than their needs end up losing money on wasted heating\cooling, property taxes, interest, maintenance, insurance on extra space they may never actually need.

By renting a place you can be much more flexible and don't have to worry about being stuck in a house you don't want to live in like millions of Americans. Of course, the establishment of realtors, home builders, government agencies, and mortgage brokers in this country make a nice living by trying to convince you that renting is throwing money away and that you'll become rich simply by owning a home.

That's fine if you have 1 extra room or a small amount of space to close off, but if it's 1000sf extra, it's not that simple. The HVAC needs to flow a certain amount or risk damaging the unit.

Also if you have two units instead of one due to the size of the house, now you're paying replacement/maintenance costs on two units.

sxn said:   woowoo2 said:   Why pay to heat space your not going to use?

Just close the vents and doors to those rooms.

Why not go with the bigger house and rent out the unused space?

Near the height of the bubble bought a smaller-than-I-could-afford place. The savings in maintenance, taxes, electricity, heating/cooling has probably been > $70K over 8+ years.

It also depends on how the house is laid out to fit your needs. We bought a larger house, and the way it is laid out and the way we repurposed some of the bedrooms we were not using for sleeping, we use and are in all the rooms every day. But I agree if you just have a bank of bedrooms on the 2nd or 3rd floor that no one goes in, then more space can be a waste.

StevenColorado said:   Why not go with the bigger house and rent out the unused space?
I dont think this is as easy when you are talking about a SFH/townhouse with a couple and perhaps one child. If it is a separate basement space with separate entrance (and there are no local restrictions on renting it), it might be easier. If it is an extra bedroom in the upper level and the renter would have to go through the main house to his/Her Room, privacy/security considerations would make this very difficult.

Don't get trapped into the mistake of these anecdotes where the problem isn't related with "growing into a larger home". For example, if you are in an unstable employment position such that you may lose your position and have to move across the country for another job, it's probably not a good idea to buy a house at all, let alone a larger house than you need.

However, it is *always* a good idea to buy a home that you expect to grow into, unless your expected growth is longer than 5-10 years into the future. Why would you buy a place that'll be too small for you in 2-3 years? That's just poor planning.

Small houses build strong families.

stkpker said:   Small houses build strong families.

you build up a lot of muscle fighting with each other.

I think the interest rates would impact this a lot. If you can lock in a very low 3% interest rate today then you may come out ahead buying the dream house now versus starting with a small house and then buying the dream house later at a higher interest rate.

If interest rates were flat over the next 30 years then I expect you'd come out ahead financially buying a starter house for the first 10 years then upgrading to a dream house for the last 20 years. But if interest rates are 4% today and jump to 6% in 10 yeas then you may actually do better in the long run buying the dream house now and skipping the starter. Of course interest fluctuates over time and you'd have the opportunity to refi later on so its hard to say how much interest would matter. How likely are we to see mortgages in the 3-4% range over future decades? We didn't see them in the previous 3 decades. Its not to say they won't happen again but some things don't happen nearly as often, e.g. >10% yield on t-bills in the 80's.

How likely are you to stay in any home for a long period? If you're more likely to move then that makes buying a dream house sooner than needed less likely to pay off.
(edit: to clarify, by this point I mean move out of the area in question altogether)

How about appreciation? If appreciation is low then that makes buying a starter now better and if appreciation is high then buying the dream house early may make more sense. Its also possible that appreciation may differ between the two houses and one may appreciate faster than the other.

tennis8363 said:   Heating, cooling, property taxes, maintenance on more square footage, potentially a bigger yard to maintain, more doors, windows, siding, roofing material that can fail... and on and on.

Just pointing out that while the above is true to a great extent some of that depends on all else being equal which is rarely the case with houses. For example a larger but efficient house may in fact be cheaper to heat/cool than a smaller older poorly insulated house with single pane windows. My house (built in 1986) is twice the size of a close single friend's but his has no insulation in the walls (built in the late 1940s) and our heating and cooling costs are only about 10-20% different even though mine is twice the square footage. Also while a bigger house will have more windows and doors, condition comes into play as well. If you buy a house today there is a very good chance you will move within 20 years, thus if the larger house has relatively new and good quality windows, doors and roof material there is a very good chance you will move before you have to replace any of them (of course their value to a greater or lesser extent should be represented in the price of the house so you may be paying for them upfront--or not). That said I totally agree on the yard that was the biggest mistake I made when I bought my house was underestimating what it took to maintain a 1 acre yard.

Same applies to property taxes which can vary a lot even in the same metro area. As always YMMV.

Every time you sell the house, you lose 7% of its equity in commissions and transaction costs. Every time you buy a house, getting a mortgage and the closing costs will cost you another 2-3% of the house value. Don't forget moving expenses. House hopping every few years is a sure way to waste a lot of savings.

Think long term. The big question, of course, is whether and when you will have children. If you have even remote plans for kids, then get enough bedrooms, find a house in a good neighborhood and school district.

Now, I am not advocating buying a gigantic house. I do discourage from buying a house that you know will not be sufficient long term. Decide what is "big enough" for you long term and go for it.

vegas4x4 said:   That's fine if you have 1 extra room or a small amount of space to close off, but if it's 1000sf extra, it's not that simple. The HVAC needs to flow a certain amount or risk damaging the unit.I agree, although it depends on where the rarely used square footage is. One of the most commonly used strategies for having rarely used but very useful and relatively inexpensive square footage is to have a finished terrace level/basement with a couple of bedrooms and a full bath or two. Your utility costs associated with those bedrooms would be relatively miniscule and having substantial but rarely used finished square footage there wouldn't really be a problem. It also wouldn't cost nearly as much as having the same amount of unused square footage in the main portion of the house.

Also if you have two units instead of one due to the size of the house, now you're paying replacement/maintenance costs on two units.I know that it depends on the area, climate and size of your home, but at least in our area all newer homes automatically come with separate heating and cooling systems for each level, so you are paying for it anyway (although the size of the units will obviously be affected by the square footage). So, if you've got a two story house with a basement, you are going to have 3 systems and, for larger properties, 4. This increases energy efficiency and comfort, as it allows you to maintain your desired temperature everywhere.

aleck said:   Every time you sell the house, you lose 7% of its equity in commissions and transaction costs. Every time you buy a house, getting a mortgage and the closing costs will cost you another 2-3% of the house value. Don't forget moving expenses. House hopping every few years is a sure way to waste a lot of savings.

Think long term. The big question, of course, is whether and when you will have children. If you have even remote plans for kids, then get enough bedrooms, find a house in a good neighborhood and school district.

Now, I am not advocating buying a gigantic house. I do discourage from buying a house that you know will not be sufficient long term. Decide what is "big enough" for you long term and go for it.


I agree that your numbers are pretty accurate as far as transaction costs. I will say that, if you can buy houses for well below FMV, you can make money or at least break even when you move.

A school district does not matter until the kid is 5 or older. So unless pregnant you have at least 6 years before you need a good school district. So if the kids do not exist yet then do not buy for that. Buy what you will need in the next 5-8 years as it is hard to predict past that.

lindylady said:   A school district does not matter until the kid is 5 or older. So unless pregnant you have at least 6 years before you need a good school district. So if the kids do not exist yet then do not buy for that. Buy what you will need in the next 5-8 years as it is hard to predict past that.

I disagree with you. Better school district and it is likely to hold value better and make it easier to sell. While you may not need to put anyone in school it is likely that you are selling to someone that might. The better the school district the more appealing it is when you go to sell (or rent for that matter).

Buying a house, size should not be top priority. As long as you feel cozy.
Things could change and future is hard to plan or predict. Small house today could become big or vice versa. But "location" could keep the house value. If things changed, either to sell or rent at least financially wouldn't be a loss battle.

Bagofchips said:   Maybe you want to explore the not so big house mindset?
I fixed the link for you:
Here

Moral: Buy a house you have some potential to grow into. See story below.

Try to execute your 5 year plan but, consider is the house a good fit for 10 Year plan/situation.
I originally bought mine with 3-5 year plan then my 5th year was 2008 then 2009 happened. Got married in 2008 and was skeptical we would be in the house 1-2 years. Again read then 2009 happened. Wife lost her job in 2010. So here we are just had our second child in 2012. We are tightly cozy in our (1500 sqft)No basement 3 bed 1.5 bath house. I purchased the house when I was single. I bought in good schools/neighborhood with my( Just in case something bad happens 10 Year Plan)in mind. I was fully expecting to buy something new 1st year after I was married (5 year Plan). So here I am living 10 years in same house, it's completely redone to best we could afford/do to help make it livable for our family of four. I expect another 2-3 years possible before the house limits our family growth plans(15 Year plan was not on the books back then). Good luck to those that have make this decision.

Another approach would be to buy a right sized house now.. that is architecturally appropriate to add onto when the need arises...

Look I've had this conversation with people a lot lately, and...

I think there are only 2 smart options:

1) Rent the space you actually need instead of buying something to large(and overpaying for space you don't need) or buying something that fits you temporarily(and taking losses from friction costs that are higher than the insufficient savings generated from owning a home temporarily)
2) Buy a home that fits your needs now and that both A) you like B) would for sure cash flow as a rental. Usually those aren't the types of places that you would really love to live in, but it'll be a hell of a lot better for you once you have to upgrade.

And for those that say you should buy a house and grow into it... No! The entire financial calculation today resides on the rent vs. buy calculator. If you were to rent let's say 1200 sq feet and are looking at buying 3500 sq feet(because you want something to grow into) than you don't run your personal financial analysis between 3500 sq feet purchased home and 3500 sq feet rented home. Instead you run your rent vs. buy calculator between the 1200 sq feet apartment and the 3500 sq feet house because the express reason why your going with the 3500 sq foot house is a financial rationale...that it will require you to incur more costs in the long run buying the 1200 sq foot home and upgrading later than buying the 3500 sq foot home now... whereas the 1200 sq foot rented apartment can be changed out any time for no real additional costs which is why you would choose that sized apartment if you rented. Hence why this 1200 vs. 3500 rent vs. buy is the only correct formula.

Once you run a 1200 sq ft vs. 3500 sq ft rent vs. buy calculation you'll realize very quickly how stupid the notion is to buy something to grow into and how much money you're pissing away in the process.


Note: Of course if you could reasonably predict that housing would be appreciating at 8% a year in the future than by all means buy the larger home because the appreciation would be worth more than additional cost for unneeded space, but who the hell is going to predict a return to 8% appreciation rates any time soon? ...And this my friend is why it was 'smart'(facetiously) for people to buy larger homes during the boom and why most of the action was at the high end of the market. And today you see the low end market stabilize quickly while the high end market barely has a pulse. It is because financially back then bigger home meant more appreciation and today smaller home equals a higher return on rent vs. buy calculator.(it should be pointed out that the latter is actually normal while the former wasn't, but that isn't stopping people from adopting many of the dumb attitudes that existed during the boom years like 'We'll overpay a place that we'll grow into').

dshibb said:   Look I've had this conversation with people a lot lately, and...

I think there are only 2 smart options:

1) Rent the space you actually need instead of buying something to large(and overpaying for space you don't need) or buying something that fits you temporarily(and taking losses from friction costs that are higher than the insufficient savings generated from owning a home temporarily)
2) Buy a home that fits your needs now and that both A) you like B) would for sure cash flow as a rental. Usually those aren't the types of places that you would really love to live in, but it'll be a hell of a lot better for you once you have to upgrade.

And for those that say you should buy a house and grow into it... No! The entire financial calculation today resides on the rent vs. buy calculator. If you were to rent let's say 1200 sq feet and are looking at buying 3500 sq feet(because you want something to grow into) than you don't run your personal financial analysis between 3500 sq feet purchased home and 3500 sq feet rented home. Instead you run your rent vs. buy calculator between the 1200 sq feet apartment and the 3500 sq feet house because the express reason why your going with the 3500 sq foot house is a financial rationale...that it will require you to incur more costs in the long run buying the 1200 sq foot home and upgrading later than buying the 3500 sq foot home now... whereas the 1200 sq foot rented apartment can be changed out any time for no real additional costs which is why you would choose that sized apartment if you rented. Hence why this 1200 vs. 3500 rent vs. buy is the only correct formula.

Once you run a 1200 sq ft vs. 3500 sq ft rent vs. buy calculation you'll realize very quickly how stupid the notion is to buy something to grow into and how much money you're pissing away in the process.


Note: Of course if you could reasonably predict that housing would be appreciating at 8% a year in the future than by all means buy the larger home because the appreciation would be worth more than additional cost for unneeded space, but who the hell is going to predict a return to 8% appreciation rates any time soon? ...And this my friend is why it was 'smart'(facetiously) for people to buy larger homes during the boom and why most of the action was at the high end of the market. And today you see the low end market stabilize quickly while the high end market barely has a pulse. It is because financially back then bigger home meant more appreciation and today smaller home equals a higher return on rent vs. buy calculator.(it should be pointed out that the latter is actually normal while the former wasn't, but that isn't stopping people from adopting many of the dumb attitudes that existed during the boom years like 'We'll overpay a place that we'll grow into').


You are missing a key factor here. What if there are no 1200 sf homes to rent in the area where you want to live. For example I live in Southlake, TX. You are free to look, but you will see that there are no 1200sf homes to rent. Our city does not allow apartments so there are none of those. Most would move into here because of the school system so it would be to rent 2500sf which would run from $1800-$2500 (guess) or buy a larger house they can grow into. My guess is that the difference is minimal. Or maybe it comes down to buy 2500-3000sf or buy 3500-4000sf. I probably buy the house I can grow into. To me there are factors to consider. If you happen to want to buy in a city that has 1200sf homes available then it may make sense. A Southern CA example I can think of is San Marino, CA. You likely aren't renting a 1200sf house there.

Our situation currently is one I wouldn't have fathomed 2 years ago which is we bought a house that is around 4400sf and we thought we would never move. Due to a situation I can't discuss (I will when I am allowed to) we may end up moving and upgrading because this situation may give us the opportunity to have a 4th (and maybe 5th) child.

The point is you never know what your needs are going to be 3-5 years from now.

Derffie said:   Another approach would be to buy a right sized house now.. that is architecturally appropriate to add onto when the need arises...I know that this is an approach that is used in some states, such as California, which has a rather peculiar property tax system, which essentially encourages people to stay in their homes rather than move. In most other states, however, this strategy just wouldn't work for a number of reasons. There are zoning restrictions and restrictive covenants/architectural controls that make it difficult to build additions. Even more importantly, in most of those cases building additions onto existing structures ends up being significantly more expensive than just selling and buying something new that fits your needs.

Moosy said:   
3) Oddly enough living in a place that was much bigger (2,500 sq-ft) than we needed taught us we didn't need such a large place. We ended up moving to a 1,000 sq-ft apartment for two-years.


I want to echo this sentiment. In my experience 500 sq-ft per person is about the most space that still makes a difference in quality of life. After that it starts to be about having another dining room, or another TV room, or another guest room. So the question should be about how many people you expect to have living in your household.

While I don't have time to dig up the citation this morning, happiness research also indicates that the size of one's home only increases satisfaction temporarily, for about three months. After that we adjust to whatever bigger or smaller space we moved into and we're back to normal.

What however affects happiness permanently is the length of one's commute. So I would always encourage you to choose a place closer to work over one that's bigger, all else being equal.

enc0re said:   I want to echo this sentiment. In my experience 500 sq-ft per person is about the most space that still makes a difference in quality of life. After that it starts to be about having another dining room, or another TV room, or another guest room. So the question should be about how many people you expect to have living in your household.I think that these are highly subjective judgments that cannot really be extrapolated onto other people. A lot depends on your lifestyle, your priorities in life, household makeup, desire to entertain, etc...

For instance, if you've got family and/or guests that stay with you fairly often, you'll probably want more space. If you want an au pair, you'll need additional space. If you entertain people in your home, you'll probably look for certain features, layout and enough square footage to do so.

While I don't have time to dig up the citation this morning, happiness research also indicates that the size of one's home only increases satisfaction temporarily, for about three months. After that we adjust to whatever bigger or smaller space we moved into and we're back to normal.The only thing that I think this shows is that people are adaptable and that your context is very important. What did you drive when you were in high school? Chances are that you were ultra happy with it and were just thrilled to have a car. Did you live in a dorm/tiny apartment in college that you had to share with a roommate? You were still probably pretty about with your living arrangements at the time though.

How would you feel about going back to the same lifestyle now? I am going to hazard a guess and say that you probably wouldn't be all that happy about it. I'm sure you'd learn to adjust and, over time, become quite content with it but now that you've experienced some of the creature comforts and luxuries, it would be an adjustment to go back and live the way that you did back then.

It's pretty axiomatic that the initial excitement associated with new "anything" wears off over time, as you get used to it. This doesn't mean that you don't appreciate the comfort and convenience associated with those things, however. Hence, the reason that I think that you are completely misapplying this research if you read it to mean that a house with more comfort, square footage and convenience features (assuming that it's affordable, of course) would end up feeling the same to you as the house with far fewer of those things. It doesn't necessarily mean that the former is a better buy but it does mean that I think that you are misinterpreting research results.

I don't own a house, and never have. However, have been considering buying one. My personal thoughts / opinions, in no particular order or arrangement:

1. Buy-vs-rent discussions are often not as informative, if, say, you are planning to buy a 3-bedroom 2000 SqFt house, but what you would rent is a 2-bedroom 1450 SqFt apartment or townhome. The two are not comparable. With additional considerations I don't want to bring up, buy-vs-rent discussions are also meaningless.

2. In buy the biggest determinant of whether or not you are calculating your TCO (total cost of ownership) is the time you own that house. The realtor's "if you are planning to keep it for 5-7 years, then you should be fine" is not fine. 5-7 years is an extremely small amount of time, given that you have to recoup: (a) 5-6% R/E commission, (b) 1-2% closing costs, or mortgage tax, or whatever there might be, (c) moves are expensive, but moving to and moving out of house are doubly expensive (count as 1-2% of your purchase price), (d) when moving to a new house, you WILL have unforeseen expenses, more so than moving into an apartment, and I am not talking about a fixer-upper,

3. The buy-vs-sell comparison is extremely difficult to do, because cost / benefit attribution is tough. The only way to do a buy-vs-sell comparison accurately is the following. Have two identical houses: B and R, with two identical families, FB and FR. FB decides to buy house B and keep for X years. While FR decides to rent house R for X years. Then after X years, we calculate total cost of ownership. For FB, you need to calculate real estate appreciation / depreciation and maintenance costs. And FR gets to invest their downpayment in any way they want.

I am nearly convinced that there are very few situations in which buying will actually win. In fact, buying will systematically win ONLY if you can time purchasing at the bottom and SELLING at the top. Furthermore, buying will systematically win if you can identify an under-the-radar neighborhood, which, say, experiences a great increase in school ratings during time time you own.

Are you prepared to sell your house and move to rent, assuming you could time the top or near the top? Maybe you said yes. Now consder again your situation when you have 2 kids, and a 40 foot long truck worth of stuff (mostly junk) in your closets going back 10 years. I did not think so.

Sorry, dshib, did not read your post, but you pretty much brought up the same points.

mikef07 said:   dshibb said:   Look I've had this conversation with people a lot lately, and...

I think there are only 2 smart options:

1) Rent the space you actually need instead of buying something to large(and overpaying for space you don't need) or buying something that fits you temporarily(and taking losses from friction costs that are higher than the insufficient savings generated from owning a home temporarily)
2) Buy a home that fits your needs now and that both A) you like B) would for sure cash flow as a rental. Usually those aren't the types of places that you would really love to live in, but it'll be a hell of a lot better for you once you have to upgrade.

And for those that say you should buy a house and grow into it... No! The entire financial calculation today resides on the rent vs. buy calculator. If you were to rent let's say 1200 sq feet and are looking at buying 3500 sq feet(because you want something to grow into) than you don't run your personal financial analysis between 3500 sq feet purchased home and 3500 sq feet rented home. Instead you run your rent vs. buy calculator between the 1200 sq feet apartment and the 3500 sq feet house because the express reason why your going with the 3500 sq foot house is a financial rationale...that it will require you to incur more costs in the long run buying the 1200 sq foot home and upgrading later than buying the 3500 sq foot home now... whereas the 1200 sq foot rented apartment can be changed out any time for no real additional costs which is why you would choose that sized apartment if you rented. Hence why this 1200 vs. 3500 rent vs. buy is the only correct formula.

Once you run a 1200 sq ft vs. 3500 sq ft rent vs. buy calculation you'll realize very quickly how stupid the notion is to buy something to grow into and how much money you're pissing away in the process.


Note: Of course if you could reasonably predict that housing would be appreciating at 8% a year in the future than by all means buy the larger home because the appreciation would be worth more than additional cost for unneeded space, but who the hell is going to predict a return to 8% appreciation rates any time soon? ...And this my friend is why it was 'smart'(facetiously) for people to buy larger homes during the boom and why most of the action was at the high end of the market. And today you see the low end market stabilize quickly while the high end market barely has a pulse. It is because financially back then bigger home meant more appreciation and today smaller home equals a higher return on rent vs. buy calculator.(it should be pointed out that the latter is actually normal while the former wasn't, but that isn't stopping people from adopting many of the dumb attitudes that existed during the boom years like 'We'll overpay a place that we'll grow into').


You are missing a key factor here. What if there are no 1200 sf homes to rent in the area where you want to live. For example I live in Southlake, TX. You are free to look, but you will see that there are no 1200sf homes to rent. Our city does not allow apartments so there are none of those. Most would move into here because of the school system so it would be to rent 2500sf which would run from $1800-$2500 (guess) or buy a larger house they can grow into. My guess is that the difference is minimal. Or maybe it comes down to buy 2500-3000sf or buy 3500-4000sf. I probably buy the house I can grow into. To me there are factors to consider. If you happen to want to buy in a city that has 1200sf homes available then it may make sense. A Southern CA example I can think of is San Marino, CA. You likely aren't renting a 1200sf house there.

Our situation currently is one I wouldn't have fathomed 2 years ago which is we bought a house that is around 4400sf and we thought we would never move. Due to a situation I can't discuss (I will when I am allowed to) we may end up moving and upgrading because this situation may give us the opportunity to have a 4th (and maybe 5th) child.

The point is you never know what your needs are going to be 3-5 years from now.


While I agree with your general point, you have to keep in mind that in an area like Southlake (or presumably any particular area in a big city), you're not limited to that community. You could move to Westlake or Coppell or Hurst or Grapevine or a hundred other communities that might have a home that is better suited to your needs and financial situation.

Skipping 50 Messages...
dshibb said:   mikef07 said:   dshibb said:   mikef07 said:   dshibb said:   JTausTX said:   dshibb said:   Yeah if your rent is 1% of purchase price you should look into owning
Million dollar question to everybody out there: Would you ever willfully rent a place that is substantially larger than what you want or need at the moment? [No!] Why? [Because that's just additional rent expense with no benefit] Precisely so why do you think buying a home larger than you need has next to zero cost to carry for that additional space?


The obvious answer to this is no.

However, the reason for this is that with a rental you can leave at the end of your term with no additional costs (aside from perhaps a lost deposit) and find a place better-suited to your needs. When you purchase a home, it becomes much more expensive to move frequently, and you are exposed to more market risk. So it makes sense to buy a home that you can grow into (as opposed to renting a place you can grow into) because you'll most likely be there longer.

Now, you say to keep the first house and rent it out. Well, that's all well and good, but what happens if you get a deadbeat tenant, or can't rent the place, or a tenant destroys it? Then you're up shit creek.



Bolded: My point precisely again why you need to still perform an analysis between renting a smaller place(with no additional costs for moving up) and buying large(to grow into).


Am I just writing this in a way that is hard for people to understand or what?


Step 1- Decide if buying or renting makes sense

Step 2a - If renting makes the most sense - Rent
Step 2b - If buying makes the most sense then (Decide what OP is talking about)

I think everyone perfectly understands but that is not what the OP was talking about. Your step is step 1. Most of us here are assuming a person has gone past step 1 and has decided that it is best to buy or wants to buy for whatever reason. At this point do you buy what fits now or buy larger. The key word is buy. No one here said buying is the best financial move every time, but when a person is buying what financial considerations should one consider.

Someone should always do step 1 like you stated earlier before considering step 2


I disagree:

1) Rent small vs. Buy small
2) Rent small vs. Buy big(for someone facing the question of buying large or buying small this one is important that you do as well).
3) Rent big vs. Buy big
4) Buy small vs. Buy Big
5) Rent Big vs. Buy small
5) Rent small vs. Rent Big(probably don't need this one)

If you did all of these you will come to the right answer. If you do some generic rent vs. buy calculation to narrow between those 2 and then do an analysis of the different options within your choice(let's say buy) you invariably end up changing details that could have an impact on whether you chose the other option(rent in the example).


Again I dumbed it down, but most of us are only talking about what to do on step 4, nothing to do with 1-3 or 5. I could list a bunch of other steps you forgot, but again trying to keep it simple.


The key point is that in order for you to truly understand #4 you also should do #2 because if you pick buy big because of the friction costs associated with selling and buying again in the future than you should also once again compare against an option that has frictionless costs in upgrading.

My whole point the whole time is that even if you decide buy over rent if you decide 'grow into' house over 'current needs' house you then should go back and revisit #2.


That is solid and makes sense. If you know you are going to need bigger then either buy it or rent smaller until you can afford it or you actually need it. No point in buying smaller if you know you will need bigger. If you think you will need bigger then you may want to hold off a year or two until you know one way or the other.



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