Peter (bigpeteb) wrote,

Housing: Rent vs. Buy

Wow, it's been a long time since I used LiveJournal for anything. Anyway, to the topic at hand:

First, I of course have to disclaim myself: I'm no expert. I've been trying to read some books to educate myself on the home-buying process, and I'm not expecting to shop seriously for another 6 months or so, so that I can get my finances a little more settled with my new job.

My goal is not to get rich; I just want to use my resources wisely (savings, income, education, credit, etc.). I think of housing as an "investment" in the same way as a savings account: it's doing something with money that's better than sticking it under a mattress or lighting it on fire. I'm not trying to speculate or gamble with my money, just make it work for me.

To simplify the discussion, I'll give out some numbers to work with. My take-home pay—after deducting the $5000 annual limit for an IRA and taxes—should be around $4,800/mo. Currently I'm paying $1000/mo for rent, for which I get 3br/2ba in 1450 square feet. My credit rating is excellent (or whatever they like to call the top rating). I have a bit of debt in student loans and credit cards, each of which I could knock out in less than 6 months if I followed an aggressive schedule. However, I have no savings to speak of, so knocking out the debt precludes saving a significant amount (which may not be a bad thing; it just depends on how much money I'm going to need on hand and how soon). I'm planning on staying put for at least 4 years from now (so that company stock options can vest, and so I can build up some really strong experience for my résumé).

Some quick things I'm not sure everyone knows. 1) Yes, I have very little money for a down payment. There are options for first-time homebuyers like FHA that can help you get a mortgage with very little down payment. That's as much as I'll say on that, since I haven't researched it thoroughly, but let's assume for argument's sake that it's possible for me to get a mortgage for as little as 5% down. 2) There continues to be a glut of distressed houses in Atlanta right now. There are options like short sales, where the owner sells a house for less than it's worth to stave off foreclosure. Then, during the actual foreclosure process, houses are auctioned off at the courthouse. The people who buy at foreclosure auctions are mostly investors, and you have to really know what you're bidding on if you don't want too much of a gamble. (If you have some prior knowledge about a house that you know is going up for auction, it can make sense.) I'm more interested in REO (houses that failed to auction and are now owned by the lender, who wants to get rid of it as soon as possible) and HUD (the Fed's Housing & Urban Development program, which sells foreclosed homes and gives preference to first-time buyers). In both of those cases, the home is already vacant, and you can see and inspect it before bidding, which minimizes the risk of ending up with a house in need of major repairs.

According to a quick loan search on Google, with 5% down payment (including FHA loans, obviously), I could get a $150,000 mortgage for ~5% with $2,500 or less in fees, leaving me with payments of $800/mo.

Most of the distressed homes in Atlanta are going for $100,000 or less ($50,000 is a much more common number) depending on how big you want to go. (I viewed a home from an estate sale going for $160,000 that was way more house than I need—about twice as big as my current apartment. And a mortgage for that would still be $200/mo less than what I'm paying now, excluding the one-time costs of buying.) At the more realistic prices, I'm looking at payments of $500/mo for $100,000, or $400/mo for $75,000, or $250/mo for $50,000.

I ran some numbers through Ginnie Mae's Buy vs. Rent Calculator (note: doesn't seem to work in Chrome), which says it takes into account the one-time costs and the additional costs of taxes and insurance. I had to distort the numbers very heavily against buying just to get them to come up roughly even over 4 years. And as above, the numbers I ran would get me a house that's much larger and nicer than the apartment I'm in now, so for roughly the same amount of money spent I'd be getting a lot more house.

So, here's where I'm confused: The cost of buying in Atlanta is currently much lower than renting, due to low interest and an excess of distressed homes. Renting doesn't ever make money: if I spend $48,000 in the next 4 years on rent, I'm out $48,000. If I spend that same amount on a house, that's potentially $40,000 in equity I could build up, which could be put towards the cost of a next house, or gotten back by selling the house and going back to renting. (I'm excluding some money for one-time fees, and assuming the value of the house stays constant. With a distressed home, you're buying it for less than it's worth, so that's very unlikely, but let's make the simplest assumption.) More likely, I could get a roughly-equivalently-sized house for about half as much, paying only $24,000 over 4 years (and building up $20,000 in equity), which leaves me an additional $20,000 to invest in savings, stocks, mutual funds, or anything else.

Obviously there's a worst case, where housing prices continue to plummet, and I end up with no equity. But in that case, I would have either 1) spent the last n years in a much nicer house than my current apartment, or 2) put the money I saved on a mortgage that's lower than rent into other investments. Yes, I would have lost money, but I was going to lose money renting, too.

So, everyone, please inform and educate me. What am I overlooking or miscalculating that would make renting preferable to buying given the current situation in Atlanta and my current finances?
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