Rent vs Purchase vs Pay Off Debt

Hello All,

I have assessed the current offerings in my location and the cost to rent is very similiar to the cost to purchase. The only difference is the increased outlay of cash (10% dp) associated with purchasing. Otherwise, an apartment in a safe part of town is going to run me about $900.00 a month. Whereas a purchase, including $300 taxes per month is going to cost me about $1048 on a mortgage payment. Both are expensive for me and making me nervous, but I can afford it.

What would be your recommendations? To pay off student loans with money in the bank or to take advantage of purchasing a home now with this money. My outlook is that it is cheaper to buy a condo unit now than it will be in 3-5 years from now. Or is this possibly flawed thinking?

brerpie said:
What would be your recommendations?

Search and read

http://www.fatwallet.com/forums/messageview.php?catid=52&threadid=721124&highlight_key=y&keyword1=rent

You are wrong about the cost of purchase being only 10% more. Generally rent includes a number of things you have to pay for separately when you are an owner: repairs/maintenance, some utilities...

Obviously major considerations include how long you plan to remain, the real estate market in your area...

Some areas in FL have had lots of speculative buyings in condos. Now the market is down it may continue to go down for a couple more years. If your local condo market is a buyers' market this selling season, it is a good bet next year price will be softer.

An easier question to answer is about your student loans. If the interest rate of the loan is lower than that of a typical second mortgage you can get (say 80-20), then you should keep the loan. Otherwise pay it off and get a second lien mortgage to finance your perspective home purchase.

Somone drank a bit too much this morning

i386 said: you should never, i mean never pay for your own home.


Instead of Condos, Id buy a House(no matter what the price) with 2 floors and a basement, make the house into 3 separate living spaces and you and your family choose one of them. The rent out the other 2. Get a mortgage to pay for the house. Maybe a 30 year.


Lets say house is 400K

400K /30 years = $13,333 you owe each year,

$13,333 / 12 months= $1,111 amount per month you owe to the mortgage.

Now you owe the bank $1,111 a month.

You have 2 extra apartments. so expect to charge ~~150% on the amount you owe. This depends on how aggressive you are.

2x $1,666 = $3,332 the total you make every month.

$3,332 - $1,111 = $2221 in profits, plus you live free.

 

I didnt include the rates and fees you owe the bank, but with your added prodits, that should be no problem.

i386 said: you should never, i mean never pay for your own home...The only sentences that make sense in your post are "Get a mortgage to pay for the house. Maybe a 30 year." The rest is, like the rest of your posts, pure garbage. For an engineer you are REALLY bad at math. Now go away grasshopper.

Of course there is no 1 right answer for everybody. Couple that with all the unknowns in your situation (how long you are going to live in the area, how secure is your job, you planning of getting married, have you ever owned before/know about repair costs, is your market going up or down, etc.) and any advice is just a guess at best.

Here goes my guess - Since your are "nervous" either way, I vote for renting. Renting has a lot less potential downside (e.g. no big surprise repair out of your wallet) and you can usually get out of the deal with maybe only a month or two notice instead of a sales commission and maybe months waiting for a buyer. Take 1/2 the potential down payment money and pay off 1/2 the student loans. Keep the rest as a emergency fund in a high interest account. Use some free time over the next few months to get better acquainted with the real estate in your area. Figure out if prices are going up or down. If up, you are comfortable with owing, and find a good house then jump on the deal. If prices are going down, or you still are nervous about owning, then keep renting.

brerpie said: Thank you for the great advice. I'm not concerned about the mortgage payments because it is well within my means. The only thing that sucks is the tax of $300 a month. Is there any way of getting some of this back or reducing the tax ammount?$300/month for taxes seems high for a condo - are you sure that is correct.

At least property taxes are tax deductable against your income tax so in a sense you can get some of it back.

i386 said: DeanaCal said: i386 said: you should never, i mean never pay for your own home.


Instead of Condos, Id buy a House(no matter what the price) with 2 floors and a basement, make the house into 3 separate living spaces and you and your family choose one of them. The rent out the other 2. Get a mortgage to pay for the house. Maybe a 30 year.


Lets say house is 400K

400K /30 years = $13,333 you owe each year,

$13,333 / 12 months= $1,111 amount per month you owe to the mortgage.

Now you owe the bank $1,111 a month. Even for the worst apartment here in the bronx, you arent looking at less that 1k a month and houses usually go for $400K.

You have 2 extra apartments. so expect to charge ~~150% on the amount you owe. This depends on how aggressive you are.

2x $1,666 = $3,332 the total you make every month.

$3,332 - $1,111 = $2221 in profits, plus you live free.

 

I didnt include the rates and fees you owe the bank, but with your added prodits, that should be no problem.
Ummm, who's going to rent 1/3 of a house for $1,666 a month if they could buy their own whole house for $1,111 (plus rates and fees owed the bank, of course). Where would you find these tenants, and if they are dumb enough to do that, do you want them living that close to you?

um in NYC, this is common as can be.

$300/month for taxes seems high for a condo - are you sure that is correct.

At least property taxes are tax deductable against your income tax so in a sense you can get some of it back.

__________________________________________________________________________________________________________

The asking price of the condo is $129,900. If I move forth, I am going to ask $126,000. The tax in this part of town (Houston) is 2.8%.

This equates to 3637.2 / 12 = $303 monthly.

Property taxes in Texas are much higher than most states. There is no state income tax. I took a superficial look at moving to Austin a while back, and found that TX property tax would be roughly equal to the property taxes on a comparable home + income taxes in Colorado.

So $300/mo for a $130k condo is probably not a mistake.

brerpie, you should definitely find out about HOA fees and assessments. Those can be a huge factor in condos. Is this place downtown? I know there are many nice suburbs where $130k can get you a house.

I don't think I'd rush to pay off student loans. You likely have a pretty cheap rate on those, and should be able to get more cheap money for a condo/home purchase now. I believe rates will be a little higher in 2-3 years.

What is not totally correct, Mikef07? I don't think brerpie was asking if I could have reduced total expenses by moving to Austin.

I said property taxes + income taxes would be similar for me, and you seem to be arguing that property taxes + income taxes + mortgage interest + principal + insurance would be different. See what you did there?

Where do you get your Denver numbers, mikef07? I've lived here for 12 years.

In most of the city & county of Denver, residential property tax rates are about 0.5% of market value. The new developments in Lowry, Fitzsimmons, and Stapleton have special tax districts that raise this to about 0.75%. So a $400,000 house will have property taxes of $2000-$3000. We own a house worth almost $300000 now and last year's property tax was almost $1500. We're buying one in Stapleton worth about $500000, last year's taxes were about $3700.

I'm also skeptical of your suggestion that housing in Denver is twice as expensive as Austin. More expensive, sure.
http://www.americandreamcoalition.org/BriefCO.pdf says a $200k Austin house would cost $335k in Denver.
http://austin.about.com/od/localstatistics/a/costofliving_3.htm says $199k in Austin would be $345k in Denver.
The Austin Chamber of Commerce has an updated dataset of the previous, saying $220k in Austin is $371k in Denver. The same page says total state & local taxes per capita in Colorado are exactly 10% higher than in Texas, btw.

Finally, CO state tax on $22,000 of income would probably be about $0. It's a flat tax, but on federal taxable income. So you get standard or itemized deductions and exemptions. Even accepting your premise that housing is twice as expensive, in my case it would take a gross salary of about $65k-$85k to reach state income tax of $2k-$3k and even up with property tax.

If you're suggesting it's possible for someone's specific circumstances to make Austin's property & income taxes more financially attractive than Denver's, of course that's correct. If you're arguing that is the case for me, you're wrong and in a pretty hopeless position of knowing very little of the specifics of my situation. How expensive were the houses I was looking for? What is my taxable income? I didn't specify mostly because they seem to have no relevance to this thread.

But specifics aside, you've overestimated just about every relevant factor:
Housing costs are about 70% higher, not 100%
To have property tax of $4000, a Denver house would need a value of *at least* $533k, not $400k
To have CO state income tax of $1000, gross income would probably need to be over $40k, not $22k

Yes, u2head8, those are total property taxes, schools are always the biggest chunk of that. Go ahead and envy our property taxes, I'll envy your $150k house.

SlimTim said: Yes, u2head8, those are total property taxes, schools are always the biggest chunk of that. Go ahead and envy our property taxes, I'll envy your $150k house.

Haha, the $150K was the number when I got it about 5 years ago. The current market around my house now is about 280K.

However, that tax was about the same as when I moved in, county assessment was around 121K in 2002, same as now.

mikef07 said: Denver .84

http://www.allcountries.org/uscensus/517_residential_property_tax_rates_in_selected.html

Income tax 4.62%
That .84 property tax rate says it's from 1995. The page goes to 1998, when it says the rate was .69. Colorado has a pretty restrictive constitutional amendment regarding state tax collection (gross revenue basically has to track inflation + population growth unless there is specific voter approval), so it's possible these numbers were correct. In fact, as I recall, when our first house was worth about $140k in 1995, I believe our annual property taxes were around $1100.

But I was talking about 2006. I assume that's what you meant to discuss too.

And yes, CO income tax rate is 4.625% now (it was 5% back in 1995, dropped due to that amendment). I wasn't suggesting it is lower - do you understand what I mean by exemptions and deductions? In my case it means a little over $20k of my income is untaxed. So ($75k - $20k) * 0.04625 = $2543 in state income tax. Effective tax rate can vary significantly depending on an individual's allowable deductions and expenses, and will start off at or near 0% for low incomes and approach 4.625% as income increases, making the deductions & exemptions less significant.