As featured in The Wall Street Journal, Money Magazine, and more!
     

The Only Way Buying As Much House As Possible Is Smart

This article was written by in Real Estate and Home. 22 comments.


Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, I remained fiscally conservative with my extra income, putting as much into savings as possible, not believing earning an income from primarily blogging would be sustainable in the long run.

Accepting the fact that I had a growing income, I allowed myself to move into a bigger apartment in a nicer neighborhood. That was seven years ago. And around this time these past few years, I’ve repeatedly considered whether it’s time for me to buy a house, leaving the world of renting behind.

The popular belief seems to be renting is throwing money away, but I couldn’t disagree more. Renters’ expenses for living are much lower than those of homeowners. The expenses of living in a house, and maintaining the structure and the land, add up and make this proposition very expensive. A house may increase in value over time, but rarely enough over the long-term to beat inflation, and in order to realize any of those gains, owners must sell and downsize.

I can’t even decide where I want to live, so buying a house that I might end up leaving soon isn’t a good decision. I could find myself in another predicament relatively soon — whether to try to sell a recently-purchased home or try my hand as a landlord, potentially from a distance. This doesn’t seem to be the type of lifestyle I would want, not to mention I haven’t yet had the need to develop some of the skills that would enable me to take care of problems around a house.

There is an urge for me to leave. I would like to have more space, not less. I like my neighbors but I’d probably like them more if we weren’t living so close. The reasons to opt for a house rather than an apartment seem to be related to lifestyle, not to the potential of a financial advantage (which is dubious, anyway). So my next course of option may be renting a single-family house.

But there are ways to make owning a house pay. Forgetting for a moment that I don’t know where in the country — or the world — I want to settle down for an extended period of time, owning a house that provides an income might be a good solution for me. The reality is that I could purchase a two-family house or a house with an apartment with cash, though I may still borrow money if the situation is right. I could rent out the apartment, and the rent would cover the taxes (and potentially part of the mortgage payment if I borrow).

I live in New Jersey, and property taxes are high throughout most of the more desirable portions of the state, and those costs reduce the appeal of owning a single-family house that doesn’t generate an income.

A recent article in the New York Times warns against buying the most expensive house you can afford. Doing so involves taking on much more risk. The loss of an income you rely on can drive someone down the path towards foreclosure. An unexpected job loss can occur at any time, regardless of the national level of unemployment.

Yet, there seems to be some situations that warrant buying if not the biggest house you could absolutely afford, something at the top end of your budget. If you meet these conditions, you may be able to make stretching your budget work from a financial perspective. This is the only way it could be smart to extend your reach rather than buying the least amount of house in which you could see yourself comfortable.

  • Even after buying the house, you’ll have assets. You’re not putting all of your wealth into the house.
  • You have a clear plan for using your own home to generate income that, if combined with a conservative percentage of other income, covers mortgages, taxes, insurance, and other expenses.
  • You get a great deal.

That last point is important. And real estate agents are tricky — they want to close as many deals as possible, so they will often convince a buyer a deal is great when it’s not. I like the way Warren Buffett invests in companies. He has a brand, so an investment from Warren Buffett may be worth more than the same investment from, for example, a hedge fund. So companies will cut Warren Buffett a deal. He doesn’t just go out and buy stock in a company like we smaller investors do.

When Bank of America was on the ropes, the company gave Buffett’s Berkshire Hathaway a $1.5 billion discount on preferred shares. In addition, when Buffett decides to divest, he’ll receive a 5% premium on the value of his investment. These sweetheart deals are key to building wealth through investing at a quicker rate than buying and holding broad market index funds for more than three or more decades.

Getting a great deal doesn’t have to mean buying a fixer-upper. There are a lot of motivated sellers who are willing to negotiate, particularly if you have clout, like Warren Buffett. You won’t have that kind of clout, but having cash seems to go a long way in gaining negotiation strength for the buyer.

This is all good in theory, but in order to apply it to my specific situation, I still have questions I need to answer. I could give myself more time by renewing my lease and paying an extra free for the freedom to “break” it with notice, but that is the same thing I’ve done for the past several years. I’d like to see a change this year. Here are my questions:

  • Do I want to stay in New Jersey? New Jersey has a bad reputation, but the area where I live is nice, and there are other fantastic places in New Jersey to live. But it is expensive. House prices are high and taxes are high. I have friends and some family nearby. People who live elsewhere can get much more property for the same amount of money, and my income is the same regardless where I live. My money could go farther where the cost of living is lower.
  • If I don’t stay in New Jersey, where would I live? I have family in California — Los Angeles and San Diego — making those locations a choice that makes sense. But California is also expensive. My girlfriend lives in Phoenix and will need to stay there for at least another year, but I haven’t been convinced yet that Phoenix is the best location for me.
  • Am I willing to do what it takes to be at least some kind of landlord? My friends who are or have been landlords mostly dislike that particular choice, but I do have other friends who are able to manage properties part-time. I think a house in which I’d live that has an associated apartment might not be too difficult, and I’m in the position to be able to afford help when it comes to maintenance, but what if I decide to move fairly soon?
  • Would I be better suited to renting a single-family home? That would give me more flexibility and less responsibility, while possibly expanding my lifestyle a little bit.

There’s a lot for me to consider before I need to give my currently landlord my notice at the end of April. I don’t like the fact that indecision and inertia has kept me in the same place for several years more than I would have originally expected. What do you think you would do in my situation?

Photo: Flickr

Published or updated April 8, 2014. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,505
Rank: Platinum
About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar Financial Samurai

Ahh, one of the topics I enjoy tremendously and just wrote about today on FS.

If I were you, I’d go on an adventure and move to California or another part of the country or world. You’ve got family in CA, so why not? It really is great living out here.

As for buying a property, I think it’s a good idea to be at least “neutral” property by just owning your own home. Being a renter is fine, but it’s being “short” the real estate market, which doesn’t work out well over the long term.

Perhaps if you and your GF get married, that will be the time to buy?

Reply to this comment

avatar Luke Landes ♦127,505 (Platinum)

Thanks for weighing in! One thing I didn’t address above was my accumulation of stuff over the years. Liquidating all this “stuff” would take some time… and I’m not going to drag all this stuff across the country.

If I were to get married and plan on starting a family, it would be time, or close to it, to figure out how to be static. But then again, I’ve been static for a long time, longer than I thought I would.

Reply to this comment

avatar Financial Samurai

I think you’ll really enjoy liquidating all the stuff you’ve been accumulating. Nothing is better to get rid of stuff than to move. It’ll feel like a weight is lifted off your shoulders

Good luck! I think homeownership is worth it. Landlording is a different topic!

Reply to this comment

avatar insourcelife

I think the main thing you have to figure out is if you want to stay in NJ. Personally, if there were not a lot of things holding me there, I’d move to a place with a cheaper cost of living and buy a multi-family property. If you have a location independent business that would work very well.

Reply to this comment

avatar Kacie

Get rid of your stuff and get out of NJ! It’s good to pare down and a move is perfect for that. Move out to Phoenix for a year and then decide what to do after that. Or California.

Long-distance relationships are for the birds.

You can do something drastic like a cross-country move, so pick up and go already! :)

Reply to this comment

avatar Abby Freedman Perry

Yes, a two-family house could be the smart way to go.

But.

If you think there’s even a decent chance that you’ll move in the next few years, I think it’s a big risk. You’d have to hire someone to manage the property, which I’m pretty sure isn’t terribly cheap.

So you might still break even/make a profit if both homes are inhabited. But you still have to worry about tenants that don’t pay/have to be evicted and have to collect rent from them afterward.

Seems like a pretty big hassle. And I usually tell people to buy a house.

Reply to this comment

avatar Luke Landes ♦127,505 (Platinum)

I’ve been thinking there’s a decent chance I’d move within a year, each year for the past I-don’t-know-how-many years. I’ve been wrong each time.

Reply to this comment

avatar Donna Freedman ♦90 (Newbie)

Which to me says, “Don’t buy a house yet.” If you don’t know where you want to live/when you want to move there, hold off.
Just my $0.02.

Reply to this comment

avatar LaTisha

Move to the west coast! All of the cool kids are doing it. And seriously, who want another winter like the one we just had? Family is there, girlfriend is there. What more could you need?

Reply to this comment

avatar Financial Samurai

And this is coming from a person who lives in Atlanta!

Now you KNOW there’s something special about the West Coast yo!

Reply to this comment

avatar Donna Freedman ♦90 (Newbie)

Do nothing at all, i.e., don’t buy and don’t move. Not yet, anyway. Things are too unsettled.
Is there a chance you can go month-to-month or re-up for just six months?
To paraphrase an old saying, “Buy in haste, repent in leisure.”

Reply to this comment

avatar Yana

If home ownership offers you something you want at home that you can’t get from renting, and it is worth it to you to pay for it, then it is worth considering. I just read another great article today by James Altucher ( http://eepurl.com/R_GA5 ) which mentioned home ownership. Another thing to consider is whether you are financially able to fully pay medical expenses that might arise, even if you have insurance. Owning a home creates a certain vulnerability due to the way our medical system works, and the unregulated costs. It seems that you have been quite happy renting, and don’t really see the tremendous value many people see in home ownership – and you don’t see renting as being a waste of money. If it were me, I might consider buying a home, but not so much if I were going to risk continuing an already high level of happiness and comfort. I also think being a landlord is not wonderful. I do know someone who bought a home by taking in roommates, basically having them make the house payments. I thought it was clever, and not a bad idea for someone who doesn’t mind roommates.

Reply to this comment

avatar Troy

1st. Sell your stuff and move somewhere. It is liberating.
2nd. Rent if you dont know where you will be in 3 years (or whatever the payback period timeframe is)

That is the only reason to rent…because you will be moving soon (within 3 years is a good rule of thumb) and need flexibility.

You state “Renters’ expenses for living are much lower than those of homeowners” HA!!! Sorry man, but there couldn’t be a more false statement in existence. Renting always loses every time in every type of financial calculation in all of history with enough time involved. Here is why…

All rentals are owned by someone. In order for it to be a rental, it has to be owned by another party. They wouldn’t own it if renting was cheaper…no one would., because they would lose money, and who would own rental property deliberately to lose money. If renting was cheaper, there would be no rentals because there would be no one to own them and rent them out. Only because owning is less expensive over time are there rentals to begin with. Because no one owns a rental and loses money. Simple math and economics.

So the only reason to rent is if you need short term liquidity. IT has absolutely zero to do with owning being more expensive. It is not, and never has been or will be. It is true it is also exchanging money for a place to live, just more money than if you owned.

I would move and rent now because you don’t know what you are going to do and need flexibility. Once you know and get settled, buy and you will understand.

Reply to this comment

avatar Luke Landes ♦127,505 (Platinum)

It’s an interesting logical conundrum you provide — if renting was always the better financial decision, there would be no landlords. But the logic doesn’t work: Being a landlord — owning a house another party lives in — is not the same thing as owning the house you live in. Real estate can be a good investment, especially for people who are willing to do a lot of the household work themselves until they own enough properties to generate a big enough cash flow to outsource the work.

My observations show that (a) around here, the time until buying pays off can be much longer than the three year rule of thumb (checking with the New York Times rent vs. buy calculator here, which is quite comprehensive) and (b) many homeowners don’t anticipate that they will need flexibility sooner than they plan.

Someone close to my family has lived in the same house for forty to fifty years or so, and she’ll likely realize a major gain mostly due to the desirable location. I don’t know the details of the finances, but I know it’s a very expensive house to maintain. I did say in the article that someone would have to downsize to realize any of the gains from owning a house, and that’s exactly what she’s doing. And in the meantime, keeping the house up, including modest renovation, required much more money. If she were renting the house, I imagine the landlord would pass those costs onto her through increased rents, so there’s a lot of validity to the point that every dweller pays maintenance costs in some form, but if you look at the average rental and the average owned home, renters get by providing for their shelter with less cash flow on an ongoing basis.

There are always studies from the real estate industry that show that owning is cheaper than renting in almost all cases, but these studies neglect to factor in maintenance costs, closing costs, a 6% fee to the broker, HOA fees, etc., even when they do factor in increases in rent.

Maybe I’m biased because, having lived in this apartment for seven years, I might have been better off buying had I been able to come up with the money in 2007. (grin)

Reply to this comment

avatar Ian

Happy Good Friday, but how much has your rent increased in the last 3 years? Last 5 years? Last 7 years since 2007? Also, imagine if you had bought a single family house that you may have had an eye on, near your former employer in 2007 or even 2009. Today, check the real estate homes for sale near that address, or even check that house’s current property tax and sales. IF I had to guess, your rent over 7years have risen maybe only 20%. I’ve seen apartments rent in 2007 at $900, and today April 17, 2014 they rent for $1025-1100. But, For the same period, I’ve seen single family house property tax in ’07 at $9800, and today it’s at $13000; I still don’t understand where the 2% yearly cap is. From 07 to today, the value of home dropped about 15%. If you considered condos, I’ve seen HOA fees go from $100 to $250. Yes, even new condo developments.

Reply to this comment

avatar Yo Yo Mama

Come to sunny California – it’s never too late or early to buy a house – might as well do it and enjoy year long amazing weather. I’m biased of course, on many levels, but I do think ownership – no matter what, is a good choice for you right now. Single family home (2 BR?) or townhouse on the ocean :-)

Reply to this comment

avatar Yo Yo Mama

It’s easy to drag ‘stuff’ across the country or anywhere.
1. Hire a mover and have them hold the bulk of your ‘stuff’ in a storage facility.
2. Pile whatever you will need for a few months into your car (you’d have to drive it to your new place anyhow) – you can rent a little uhaul trailer too — drive to your destination – either your new home or with relatives or friends (you can store the excess if you are in a temporary situation) if needed.
3. Call movers, give them address – they will bring your stuff to you and move it in your new place!

Reply to this comment

avatar VA

I don’t know the details of your relationship but… I say if your job isn’t location-specific, the best thing to do would be to join your girlfriend in Phoenix and rent there.

If the relationship works out, you can decide together where to move next and if you want to buy in that location. Phoenix is pretty close to CA.

Reply to this comment

avatar Crass Cash

Great commentary! If you want to be a landlord light than maybe buy a home and just rent out one or two rooms. This usually at least pays for your property tax and insurance. It’s also a great way to meet new people.

Reply to this comment

avatar Tom Dziubek

Luke, I think you’ve spent a good deal of time analyzing the cost differences between renting and owning but it’s often difficult assigning values to two intangibles: personal space and control. I know those were two of the driving factors when I purchased my house.

I wanted to have ample distance between me and my neighbors so that our daily lives didn’t intermingle. I also wanted to build my castle as I deemed fit and not have to deal with a landlord to get things done. Naturally, the values of these things depend on the person and would more than likely be influenced by their upbringing: ie. a person who grew up in an apartment complex would probably be less averse to having a lot of neighbors close by as opposed to someone who grew up in the suburbs. (Personally, I think a greater value would be assigned to control and freedom considering how people…when presented with the means…generally strive to move AWAY from tight quarters to a place they can call their own. Usually people only gravitate to renting when their job requires it: either constant relocation or commuting to an inner-city job. I’m sure there’s a study on this but, at 5 AM, I’m thinking more about going back to sleep.)

Anyway, I think that renting is the best option for you right now. Owning is great when you have consistency like a job and/or family anchoring you in a spot. But it seems like you don’t have a discernible anchor in place right now. Because of that, shopping around for a more desirable location is probably best for you. And then once you figure out where you’d like to spend the next 15+ years of your life, buy a house.

Reply to this comment

avatar Luke Landes ♦127,505 (Platinum)

Great thoughts, Tom. This, continuing to rent, is how I’m leaning, but I think it’s time for a move. I may not be able to prepare in time for the end of my lease, so I might have to extend, but not for long.

Reply to this comment

avatar Donna Freedman ♦90 (Newbie)

I’m still of the mindset that often you don’t really *know* what you’ll be doing three years hence.
Had you told me in 2000 that in 2001 I’d leave Alaska for a job at the the Chicago Tribune, I would have asked if you were drunk.
Had you told me in 2002 that in 2004 I’d be living in Seattle and getting a midlife college degree, I would have burst out laughing.
Had you told me in 2005 that in 2007 I’d be writing for MSN Money, I would have made a rude noise with my lips.
Had you told me in 2009 that I’d move back to Alaska in 2012, I’d have shaken my head: Not likely!
Do what works for you — but remember that if you want to make God laugh, tell Him your plans. That dream job, that perfect relationship, that single-with-no-kids status could all change in an instant.
How many people never saw the layoff coming? How many men and women moved to be with a partner’s opportunities and then found themselves in a breakup situation in a strange city where they hadn’t yet found jobs commensurate with the ones they left? How many women were lovin’ their single lives until they peed on the stick?
Change is good. But sometimes change is really, really unexpected. Don’t lock yourself into a single track, is my motto. Always be ready to adapt. Harder to do that if you just bought a house or signed a one-year lease. Not impossible, but it will mean considerable layers of hassle and a lot of bucks thrown at the new problem.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: