Rent or buy a house?

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Originally Posted By: WhyMe

Renting advantages are the landlord fixes the house, pay the property tax etc. You can leave anytime you want.


Yet all that stuff HAS to be built into the rent, or else the landlord will be cashflow negative and go out of the business.

I always find it funy when it is claimed that the landlord pays this or that. In properties where it is either a complex or a single home split to multiple units, there surely is some economy of scale, but the renter is still paying it.

As they say, the money is made at the buy. The amount of cashflow required for a good ROI is where the importance is... Buy at a lower point and rents need not go up.

I agree, home prices are high now compared to renting, and for the pols to push home value recovery is somewhat silly given what renting often costs. But in the long run, those costs have to come back in line, and as they do, the renter is at the landlord's mercy, while the homeowner is only at the mercy of the tax assessor.
 
Originally Posted By: Pop_Rivit
It depends on where you're looking to live.

If I remember correctly you're in Des Moines and I would not invest in real estate in other than a few select areas. The southside used to be pretty decent, but it's gone downhill in the last 20 years or so except for a few isolated areas. There are areas just west of downtown that are trendy, but you have to choose carefully because it's a fine line between the areas that are increasing in value and the areas around Drake (my alma mater) that are low and will probably never increase.

If I were in your shoes, I'd look toward Pleasant Hill-there are some great starter homes there, along with Altoona and Carlisle. All three areas are an easy commute to Des Moines but the quality of life is much better. You could look to the west side, but prices are significantly higher for the same amount of home, while towns to the east (Pleasant Hill and Altoona) are on the increase.

Another thing to consider are property taxes-getting out of Polk County can cut your property taxes in half. Our home is in Jasper County, and our property taxes (along with insurance) are significantly lower than Polk County.

I'm assuming your Sioux Falls transfer is off the table and the Central Iowa area is going to be permanent. As far as renting vs. buying? It's a no brainer, especially in this area. Home prices bottomed some time ago and are starting back up. Markets are back to their pre-crash levels, but prices haven't fully recovered so it's a good time to buy. If you buy right, you'll get the benefit of the upswing in home prices as well as low finance rates.

There's nothing better than owning your home.


If I were to buy it would most likely be in Story county. I've decided that I'm happy with this area and I'd hate to leave it for Sioux Falls. I've also created a 3 year plan with goals for my career and DSM/Ames area is better for our future. I think right now is the time to buy but after a lot of thinking, I think saving up even more for a bigger down payment (20%) and paying off student loans will get me farther ahead in the long run.
 
Originally Posted By: JHZR2
Originally Posted By: WhyMe

Renting advantages are the landlord fixes the house, pay the property tax etc. You can leave anytime you want.


Yet all that stuff HAS to be built into the rent, or else the landlord will be cashflow negative and go out of the business.

I always find it funy when it is claimed that the landlord pays this or that. In properties where it is either a complex or a single home split to multiple units, there surely is some economy of scale, but the renter is still paying it.

As they say, the money is made at the buy. The amount of cashflow required for a good ROI is where the importance is... Buy at a lower point and rents need not go up.

I agree, home prices are high now compared to renting, and for the pols to push home value recovery is somewhat silly given what renting often costs. But in the long run, those costs have to come back in line, and as they do, the renter is at the landlord's mercy, while the homeowner is only at the mercy of the tax assessor.




Of course it depends on the cost of the home. I have a 100 year old house in Seattle that i hae owned for 25 years. City values it at 350k. I paid 75 k for it. i rent it for $1250 dollars a month. Could the OP buy it for cheaper than renting it? Not unless he put a large amount down.

The home i am living in in the Seattle suburbs is valued at 450k. Rents will support about 1750 for rent. cheaper to rent also in this case also.


When houses were a smaller portion of ones income it usually made sense to buy. Down payments were smaller and values rose about 3-4 % a year if in a good area.

As values rise, lees people are inclined to get into a market as the return is smaller. Lots of people are buying in distressed areas like Vegas and Florida because it was cheap.
one could buy a 100k house in Vegas and rent it for 800- 1000. these kind of number make sense to me.

To OP, if you intend to stay where you are for a while, expect a steady income for the time, and have sufficient down payment, then it might be good for you to buy.

Just crunch the number on a home you are looking at and see which way is more advatagageous to you.

good Luck and take care
 
Originally Posted By: WhyMe

Of course it depends on the cost of the home. I have a 100 year old house in Seattle that i hae owned for 25 years. City values it at 350k. I paid 75 k for it. i rent it for $1250 dollars a month. Could the OP buy it for cheaper than renting it? Not unless he put a large amount down.

The home i am living in in the Seattle suburbs is valued at 450k. Rents will support about 1750 for rent. cheaper to rent also in this case also.



But my point is really that this cannot stay the case forever. The two costs have to fall in line at some point. When you re-roof the 100 year old house and it costs $20k, will you not raise rents to pay for it? Will you lower them back once it is paid for?

What about when you sell. Will the next investor have the same cost basis?

I get what youre saying, and it is definitely the case in a scenario like yours where the cost basis is so low. But the thing is, say someone like myself wants to go and buy some rentals. Ill lowball, try to pay cash, etc., but there is NO way Ill get the deal you did 30 years ago, and so my rental price HAS to be higher or my profit lower.

It strikes me as a total cycle. Maybe Im wrong, I dont know... But this is exactly why we dont own any rental properties yet, though we would love to for the passive income...
 
Originally Posted By: JHZR2
Originally Posted By: WhyMe

Of course it depends on the cost of the home. I have a 100 year old house in Seattle that i hae owned for 25 years. City values it at 350k. I paid 75 k for it. i rent it for $1250 dollars a month. Could the OP buy it for cheaper than renting it? Not unless he put a large amount down.

The home i am living in in the Seattle suburbs is valued at 450k. Rents will support about 1750 for rent. cheaper to rent also in this case also.



But my point is really that this cannot stay the case forever. The two costs have to fall in line at some point. When you re-roof the 100 year old house and it costs $20k, will you not raise rents to pay for it? Will you lower them back once it is paid for?

What about when you sell. Will the next investor have the same cost basis?

I get what youre saying, and it is definitely the case in a scenario like yours where the cost basis is so low. But the thing is, say someone like myself wants to go and buy some rentals. Ill lowball, try to pay cash, etc., but there is NO way Ill get the deal you did 30 years ago, and so my rental price HAS to be higher or my profit lower.

It strikes me as a total cycle. Maybe Im wrong, I dont know... But this is exactly why we dont own any rental properties yet, though we would love to for the passive income...


If i had to reroof the house, which i have done twice already throughout the years, i can only raise it so much. maybe 50-100 a year if the economy is good and prices are rising. if not, its a write off anyways, but i still have to shell it out first.

If i sell it to someone, their cost basis is whatever they paid. One has to remember that rents are just like anything else, it market dependant. If you area has a high occupantcy rate, then you may get away at raising the rent. It all depends on what people can pay.

I tried last year to help my Aunt rent her home valued at 1.5 mil dollars. Waterfront veiwa and such. asking 3250 a month for rent. the property taxes on it are about 1500 already. Good thing she bought it for 200k 35 years ago. keep this in mind though, 200k was a lot of money back then. I tried for a few months and had few offers. people said that the rent was high and they can rent the same for less. lets see, if you put 500k down and had a 1 mil mortgage, you would expect to pay close to 7-10k a month for your mortgage.


I see that you are in NJ, which i have read has one of the highest property tax rates in the country. If you bought a home in your area, how much could you rent it for?

I have friend with a lot more homes than i do. 10/20/30 one has close to 50. they bought them years ago when they were cheap. I ask them if they are still buying houses for rent and the say no. the return dos not justify the outlay.

they say the money is in multi family and apts. Duplexs, tris and such have a better return.

It all about numbers. lot of people got killed in Cali, Vegas and Florida not because they did not have equity in their rental, they were just not liquid. When you don't get money from your rentals, you better have money to pay for the mortgages. If you don't, and all of them are leveraged to the hilt, once the dominos start falling, you are in deep trouble.

being a landlard is not for the faint of heart. you will hear all kinds of sob stories. you will meet good people, and the dregs of society. You best know how to fix thing yourself or every time you call someone to fix stuff like plumbling bring along some vaseline when you get the bill
 
It all depends.

Do not buy in a slum, if you buy at least buy somewhere that has little chance of turning into a slum, that means close to high employment location and not new development in a desert that no one wants to live. Buy good school district even if it is an older house and smaller, it is easier to sell later on than a McMansion in the ghetto.

Also try to buy if you have good credit, big down payment (20%+), and borrow within your mean (30 year fixed and not 3/5/7 year adjustable). This would dramatically cut down on your expense whether it is the borrowing fee, 2nd mortgage insurance, or interest rate. You may pay more right now but you can always refinance or pay off sooner if you want, and not having to worry about up side down, foreclosure, and other seriously damaging consequences.

Personally I would buy if I know I would be able to sell at any time I couldn't afford it. I would not want to be up side down at any time, and if I couldn't afford it I want to know it is a house in an area I can sell and people would want to buy it from me at little to no lost to my initial purchase price.

Otherwise I would rent, because the risk would be too high as employment and income is no longer stable these days.
 
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First off, thanks for the great discussion, your commentary is highly valuable and I appreciate you taking the time with firsthand experience to discuss.
smile.gif


Originally Posted By: WhyMe


If i had to reroof the house, which i have done twice already throughout the years, i can only raise it so much. maybe 50-100 a year if the economy is good and prices are rising. if not, its a write off anyways, but i still have to shell it out first.



So let's say you need to do a $10k roof job. You raise the rent going forward to pay for it. At $100/month increase, it will take you 100 months to raise $10k. That strikes me as impractical. Sure, if you own the property and are cashflow positive, you might be making more to cover it, but even if youre netting $1k/month after everything, its still pretty steep to make NO income for 10 months, practically a year, if youre working this way. Sure if you have a bunch of properties this may all average out, but I doubt that is the case for most. So if you have a bunch of big repairs, will you routinely take a loss year after year?

Originally Posted By: WhyMe


If i sell it to someone, their cost basis is whatever they paid. One has to remember that rents are just like anything else, it market dependant. If you area has a high occupantcy rate, then you may get away at raising the rent. It all depends on what people can pay.



Yeah but it makes no sense to rent a home that cost $350k for the same rate as someone who owned it for $75k. The ROI and percentages, mortgage or not, is vastly different. That kind of was my intitial thought.. as properties change hands, the rents HAVE to go up. $1250/month like you mentioned is $15k/year. Lets say it nets you $10k/yr. $10k on a $75k investment is a 13% return, which is tough to beat. $10k on $350k investment is a 2.8% return which is horrible.

Originally Posted By: WhyMe


I tried last year to help my Aunt rent her home valued at 1.5 mil dollars. Waterfront veiwa and such. asking 3250 a month for rent. the property taxes on it are about 1500 already. Good thing she bought it for 200k 35 years ago. keep this in mind though, 200k was a lot of money back then. I tried for a few months and had few offers. people said that the rent was high and they can rent the same for less. lets see, if you put 500k down and had a 1 mil mortgage, you would expect to pay close to 7-10k a month for your mortgage.



Confused. I would tend to agree, which is the issue. If rents are way out of line, then as properties turn over the rents cant possibly stay the same because it is just not sensible.

Originally Posted By: WhyMe

I see that you are in NJ, which i have read has one of the highest property tax rates in the country. If you bought a home in your area, how much could you rent it for?



If I bought a $250k rental house in a decent community (prety cheap), I could count on paying $600/month in property tax. Even if I found a $150k row home, the property tax would likely be around $400-500/month. So that's a high starting point before I even get into any kind of return on money, let alone if a mortgage was on the property... In PA or DE it may be more sensible as the taxes are half or even lower. Tax really cuts into your buyng power if leveraged, and into your potential for profit.

Originally Posted By: WhyMe


I have friend with a lot more homes than i do. 10/20/30 one has close to 50. they bought them years ago when they were cheap. I ask them if they are still buying houses for rent and the say no. the return dos not justify the outlay.



This is my thought currently. You cant get a good ROI. But then again, it is the question of being at the landlord vs the tax assessor's mercy for increases.

Originally Posted By: WhyMe

they say the money is in multi family and apts. Duplexs, tris and such have a better return.

It all about numbers. lot of people got killed in Cali, Vegas and Florida not because they did not have equity in their rental, they were just not liquid. When you don't get money from your rentals, you better have money to pay for the mortgages. If you don't, and all of them are leveraged to the hilt, once the dominos start falling, you are in deep trouble.

being a landlard is not for the faint of heart. you will hear all kinds of sob stories. you will meet good people, and the dregs of society. You best know how to fix thing yourself or every time you call someone to fix stuff like plumbling bring along some vaseline when you get the bill




Agreed. If/when we do this, it will be cash or substantial downayment, like >75%. I can kind of see on a rental, if it is cash flow positive, using leverage to get the tax advantage on your personal income, but Im not entirely sure if this is doable, and it is a different animal than keeping a personal residence leveraged, despite the discussion on the other thread.

I appreciate your thoughts and experience in this area!!

11.gif
 
Originally Posted By: WhyMe


If i had to reroof the house, which i have done twice already throughout the years, i can only raise it so much. maybe 50-100 a year if the economy is good and prices are rising. if not, its a write off anyways, but i still have to shell it out first.

If i sell it to someone, their cost basis is whatever they paid. One has to remember that rents are just like anything else, it market dependant. If you area has a high occupantcy rate, then you may get away at raising the rent. It all depends on what people can pay.

I tried last year to help my Aunt rent her home valued at 1.5 mil dollars. Waterfront veiwa and such. asking 3250 a month for rent. the property taxes on it are about 1500 already. Good thing she bought it for 200k 35 years ago. keep this in mind though, 200k was a lot of money back then. I tried for a few months and had few offers. people said that the rent was high and they can rent the same for less. lets see, if you put 500k down and had a 1 mil mortgage, you would expect to pay close to 7-10k a month for your mortgage.


I see that you are in NJ, which i have read has one of the highest property tax rates in the country. If you bought a home in your area, how much could you rent it for?

I have friend with a lot more homes than i do. 10/20/30 one has close to 50. they bought them years ago when they were cheap. I ask them if they are still buying houses for rent and the say no. the return dos not justify the outlay.

they say the money is in multi family and apts. Duplexs, tris and such have a better return.

It all about numbers. lot of people got killed in Cali, Vegas and Florida not because they did not have equity in their rental, they were just not liquid. When you don't get money from your rentals, you better have money to pay for the mortgages. If you don't, and all of them are leveraged to the hilt, once the dominos start falling, you are in deep trouble.

being a landlard is not for the faint of heart. you will hear all kinds of sob stories. you will meet good people, and the dregs of society. You best know how to fix thing yourself or every time you call someone to fix stuff like plumbling bring along some vaseline when you get the bill




As you said, some homes are just not meant for rental or flipping. The 100 year home that needs are roof of 20k is worth tearing down and build new again. The 1.5M water front home is not worth renting but for sales because the primary buyer of those are people that need big mortgage payment to deduct tax, and people who leverage it for "investment funds" like FoxS. Also apartment complex are not worth taken apart to be sold because of the potential HOA cost to dampen the price and the extra property tax you have to pay for the different valuation (apartment are considered commercial property and priced for tax differently).

Also like you said timing is everything. You cannot assume what works 30 years ago has the same return for the next 30 years. You also won't get the same mortgage if you buy for rental, and your rental income may not always be there if you lose a tenant in a depression.
 
Originally Posted By: PandaBear


As you said, some homes are just not meant for rental or flipping. The 100 year home that needs are roof of 20k is worth tearing down and build new again. The 1.5M water front home is not worth renting but for sales because the primary buyer of those are people that need big mortgage payment to deduct tax, and people who leverage it for "investment funds" like FoxS. Also apartment complex are not worth taken apart to be sold because of the potential HOA cost to dampen the price and the extra property tax you have to pay for the different valuation (apartment are considered commercial property and priced for tax differently).

Also like you said timing is everything. You cannot assume what works 30 years ago has the same return for the next 30 years. You also won't get the same mortgage if you buy for rental, and your rental income may not always be there if you lose a tenant in a depression.


A 100 year old home that the tax assessor says is worth $350k is worth tearing down over a $20k roof? Doesnt make sense.

Some properties arent meant to be rented, but with comments like this, it would only be sensible that the rental properties out there would be shrinking in number due to viability of profit, which would turn rents upward. Which was my basic premise.

And a 2.8% return, per my numbers based upon the discussion is a POOR long term return for the risk and tie-up of capital.

At that point, rate issues aside, one would be far better off "investing" in real estate via investment in mREITs which can more efficiently use leverage and get good return. Even in higher interest rate environments they will yield higher than 2.8% returning 90% of the income as dividends (that compound if you reinvest them as shares).

Simply because I dont have enough knowledge or capital for a decent cash purchase of a rental investment property, mREITs have been my choice for years...

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OP, are you planning to stay in the same area for a long time? If you may be moving within a few years to chase a better paying job, renting makes it a lot easier to just get up and go and avoid potential short-term losses.
 
Originally Posted By: JHZR2

A 100 year old home that the tax assessor says is worth $350k is worth tearing down over a $20k roof? Doesnt make sense.


It depends on how much of that is in the land and how much is in the "house". It may worth $500k if it is new instead of 100 year old.

I do agree with the rest of your post. Renting on your own doesn't return much of an investment unless you plan to sell them someday.
 
the problem in the last 10 years is that people were expecting and getting a 10% or higher yearly appriciation on their house. in one year Vegas went up 60%.Banks were really easy to loan money on those numbers. Those days are gone.

In my area, the Seattle king county area, supposedly 50% of the home are rentals. Seems crazy, but i know lot of landlords.

On the hypothetical roof situation, just because it cost you a certain amount, rarely can you offset it by charging more. Its part of being a landlord and the cost involved. If one expects to recoup the 10k in a year or even 5 years, they will be sorely dissapointed.

most of the people i know that have property that they bought early are enjoying the fruits of the headache now after owning them for 20-30 years. houses are paid off by all the tenants through out the years and its mostly income now.

for me, if i really wanted to make quick money, i would be a slum lord. Buy multi family property in distressed areas cheap and rent them out to the FSA. The .gov will pay the bills and they pay pretty good in rent cost.

Don't ever expect to become rich on rental property right away, especially when the rents don't justify investment.

I would venture to say that most of the fruits of investments are enjoyed by the next generation.
 
Originally Posted By: PandaBear
Originally Posted By: JHZR2

A 100 year old home that the tax assessor says is worth $350k is worth tearing down over a $20k roof? Doesnt make sense.


It depends on how much of that is in the land and how much is in the "house". It may worth $500k if it is new instead of 100 year old.

I do agree with the rest of your post. Renting on your own doesn't return much of an investment unless you plan to sell them someday.


I have thought about selling it throughout the years, but I have been lucky in having a string of tenants that have stayed for about 5 years or more. Good tenant that took care of my house. they only moved because they acheived the Americna dream of owning their own home, which i say more power to them.

And tearing it down does not make sense. right across the street they are building townhouses about the same price and size as my rental. To build a house these days it about 150 to 200 a SF.
 
Originally Posted By: WhyMe
the problem in the last 10 years is that people were expecting and getting a 10% or higher yearly appriciation on their house. in one year Vegas went up 60%.Banks were really easy to loan money on those numbers. Those days are gone.

In my area, the Seattle king county area, supposedly 50% of the home are rentals. Seems crazy, but i know lot of landlords.

On the hypothetical roof situation, just because it cost you a certain amount, rarely can you offset it by charging more. Its part of being a landlord and the cost involved. If one expects to recoup the 10k in a year or even 5 years, they will be sorely dissapointed.

most of the people i know that have property that they bought early are enjoying the fruits of the headache now after owning them for 20-30 years. houses are paid off by all the tenants through out the years and its mostly income now.



So its not possible to cover 10k in free cash (profit) in even 5 years? I assume that in a "good" year, the income is profit, in "repair" years, you just dont profit, roughly...

20-30 years makes sense if the homes are mortgaged. I assume its easier if bought with cash or a lot of initial equity.

Thanks for sharing your experience!
 
Originally Posted By: JHZR2
Originally Posted By: WhyMe
the problem in the last 10 years is that people were expecting and getting a 10% or higher yearly appriciation on their house. in one year Vegas went up 60%.Banks were really easy to loan money on those numbers. Those days are gone.

In my area, the Seattle king county area, supposedly 50% of the home are rentals. Seems crazy, but i know lot of landlords.

On the hypothetical roof situation, just because it cost you a certain amount, rarely can you offset it by charging more. Its part of being a landlord and the cost involved. If one expects to recoup the 10k in a year or even 5 years, they will be sorely dissapointed.

most of the people i know that have property that they bought early are enjoying the fruits of the headache now after owning them for 20-30 years. houses are paid off by all the tenants through out the years and its mostly income now.



So its not possible to cover 10k in free cash (profit) in even 5 years? I assume that in a "good" year, the income is profit, in "repair" years, you just dont profit, roughly...

20-30 years makes sense if the homes are mortgaged. I assume its easier if bought with cash or a lot of initial equity.

Thanks for sharing your experience!



I was just using the 100 number to make my point . In 5 years it would only pay 60 percent of the cost of the roof . When you are barely making or just breaking even on a property, one must be prepared to get their hands dirty. That 10k roof if DIY will probably cost 3k if DIY.

T make an informed decision on where to buy a rental , one has to take in many considerations. Things like what the median income is, growth of the area etc. one would not buy in certain parts of Detroit no matter how cheap they are because the future for that areas is bleak.

In the Seattle area there is an area that in the 80,s was drug den. People could not get out fast enough and houses were cheap. 40- 70k for a nice house. Those houses are now 300 to 500k. Sometimes you have to have a long term vision of an area to invest.

My friends that have inside info have told me the area hottest now for investment is the gulf coast. Alabama, miss anything close to the water. Still cheap down there if one wishes to gamble
 
I rent a 1br apt, that is actually a good value for its size $1140/mo trash/water included.
I think condos start around 250k+. Mobile homes go for up to 230k and you still have space rent!?!

Not a market I can buy in. Much better values elsewhere. I can bike to work, though. Much rather do that than own an affordable house 50mins away in a not so fun town.
 
We rent a 3BR 70 year old timber house. It is on a quarter acre block. We pay $1300 per month, it is the most dilapidated house and cheapest to rent house in town by about 15%. I believe if sold today it would go for $500,000 plus.

We could afford a $250,000 house but that would mean moving to the next town down the road, and 50 minute drive to work each way, and the town is not the best of 'hoods.
 
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