In this post, I examine my own situation to see whether purchasing my house was worth it from a pure numbers standpoint. I read articles that argue both sides, renting and buying a home, and each side has valid arguments. Later in the post, I will review other considerations to determine if you should buy or rent. Finally, I included a few links to other posts that personal finance bloggers have written so you can view their perspective.
My wife and I purchased a townhouse shortly after graduating college in 2010 – you know, to live the American Dream. If you remember, the housing market at this point in time was bottoming out; therefore, it was a great time for us to buy (sorry to the folks that purchased a house right before the housing market tanked). I knew the monthly payment for a house that was less than $15ok would be equal to or less than apartments we were looking at in the Minneapolis area. So at the time, I thought – Why not buy instead of rent?
The townhouse we looked at was four years old and the original purchase price for a base townhouse in this development was $250k. The townhouse was listed for around $130k, so I thought that this house could be a good investment if the housing market started to come back (even if the housing market only came back slightly). After getting lucky that an offer ahead of ours fell through, we signed all of the paperwork and moved into our first house. I have mixed feelings on townhouses versus single-family homes because of the actual value you receive paying the homeowner association fee. Be sure to understand exactly what you are getting for this fee. Let’s fast forward five years to see if this has been a smart investment. Here are the details:
- After our downpayment, the original loan we took out was for $112,663, which equated to a principal and interest payment of $554/month.
- After five years, we still owe $102,263; however, our house recently was appraised for $190,000. Therefore, we have roughly $90,000 in equity in the house.
- Over the five years, we paid about $33k into principal and interest: $23k in interest and $10k in principal. To calculate the rate of return, I used the investment we’ve made, $33k over five years and the equity we have in the house, roughly $88k. The rate of return equals almost 6%, which isn’t too bad over such a short time period.
- Below are some quick investment calculations to show how much money we could have if we instead invested the money we were pouring into the house. The $9,600 from the payment on the left is principal, interest and tax, which equates to $800/month. The middle calculation adds in our homeowner association fee (HOA), and the last calculation includes utility bill payments.
Now this isn’t very realistic because we would need to live somewhere, and we would have expenses for living: rent, utilities, etc. One reason I believe buying worked out better for us, instead of renting, was due to the affordability of the house we purchased. Many millennials are going out and purchasing homes that are $200k or more. Depending on where you live, finding a house for less than $120k can be difficult. So what should you do? Next, I will discuss some considerations based on my experience.
What else should you consider?
What is best for you and your family? That is the most important question to address on your quest for finding a place to live. I really hate private mortgage insurance (PMI), and I would strongly encourage having at least 20% saved for a down payment if you decide to purchase a home.
- Neighbors – this may be difficult to determine, but try to introduce yourself to folks in the community you are looking to move into and ask them questions about the area!
- Private mortgage insurance is required if you put down less than 20% of the house’s value for a down payment. Earlier, I mentioned that millennials are purchasing homes that are $2o0k or more. This would require a downpayment of $40,000, which is a significant amount of money for a young person or couple.
- Closing costs, which vary depending on each purchase are explained well in this article from Zillow
- Moving expenses
- Homeowner’s insurance, which you can bundle this with car insurance to get a better deal
- Property taxes, which for me were about $250/month
- Homeowner association (HOA) fees – both for townhomes and single-family homes
- Things for your new house, such as furniture, appliances, paint, curtains, etc.
- Do you plan on moving soon? There are many up-front expenses with purchasing a new home. If you plan on moving within a few years, you will likely not recoup these expenses.
- Do you want to have rental income some day? It may be worth investing in a house now and paying it down quickly then, you can generate some rental income.
Links to other related posts:
- There is a good video from the Khan Academy discussing rent vs. buy:
- M$M has a great article about living with his in-laws to save money and knock out debt: http://millennialmoneyman.com/pay-off-debt-without-moving-home/
- M$M also has a guest post, where they discuss the reasons why they did NOT move back home
- Sophia Bera has a nice article on buying vs renting
- Here is a link to a buy vs. rent calculator from the New York Times:
- Interesting article about people that graduate with a degree that pays well and may have money to invest in real estate
- Rental property discussion with Scott Alan Turner