Neither my wife nor I have ever owned a house. Since finishing college in 2007, I have rented 5 different apartments.
Just under two years ago, when my wife and I found out we were pregnant with our first child, we were living in a tiny studio apartment across the street from Fenway Park. We needed more space. But rather than rush out and find a “starter house” to buy, we found a little three-bedroom apartment for rent in a different neighborhood.
I have nothing against home ownership. In fact, we’d like to buy a house in the next few years and we’re putting a significant chunk of savings every month towards a down payment. But there are several reasons why we haven’t made the leap yet and why we certainly don’t feel pressure to rush into a purchase.
We don’t feel settled
I grew up outside of Boston, and aside from my four college years I have lived here my entire life. It’s my home.
My wife grew up between Florida and Alabama. When we met, she was finishing up her masters in Florida. That’s her home.
This is not something we’ve resolved yet. She moved up here just about four years ago, but there’s always been the possibility that we’ll move down to Florida. I enjoy my current job, but there isn’t enough stability to feel comfortable counting on it for the long term.
For those two reasons, we don’t feel “settled” in our current situation. That makes committing a big chunk of money to a house feel like a poor decision.
The basic financial math is against us
No matter how settled we eventually feel, it’s a reality that circumstances can change very quickly. Jobs can be lost, opportunities can arise, and feelings can change. Besides, other people choose to buy houses with a short-term outlook. So if we know that long-term stability doesn’t truly exist, if we know that many other people buy houses with less stability than us, and if we know that we want to buy a house eventually, what’s holding us back?
For me, it’s some basic financial math.
When you buy a house, in addition to the purchase price, there are closing costs and a potential broker commission. The same thing applies when you sell. So if you simply want to avoid losing money on the eventual sale of your house, you have to rely on price appreciation.
Here’s an equation you can use to determine the sale price needed to break even:
s – c*s = p + a*p
Where the variables are:
- s = sales price
- c = total cost of sale, including closing costs and commission, as a percent of the sales price
- p = purchase price
- a = total cost of purchase, including closing costs and commission, as a percent of the purchase price
So let’s say you buy a $200,000 house and we use some common numbers (taken from the NY Times Buy vs. Rent Calculator) to say that the purchase costs (a) are 4% and the selling costs (c) are 6%. If you plug those numbers into the equation above you come up with:
s – 0.06*s = 200,000 + 0.04*200,000
s = 221,277
So just to avoid losing money, we’d have to sell the house for $221,277.
That kind of appreciation is certainly in the realm of possibility, but I don’t like counting on it when we don’t have a long-term outlook.
And that formula doesn’t even include…
Monthly cost over rent – When you own a house, your monthly bill includes not only the mortgage payment but insurance and property taxes. Hopefully you have tenant’s insurance even if you’re renting, but it will likely be cheaper than homeowner’s insurance. And renters don’t pay property taxes. It’s not guaranteed that this monthly cost will be higher if you own, but it’s certainly possible.
Maintenance costs – When you rent, it’s the landlord’s responsibility to fix things. When you own, it’s all on you. That can really add up.
Opportunity costs – When you buy, you typically have a sizable down payment. Having that tied up in your house means you don’t have it available for other purposes, such as putting towards retirement.
Inflation – The number above only actually gets you to even in real dollars if there is no inflation. But the reality is that inflation exists, so even if you sold for that $221,277 you would have lost money in terms of real value.
If you want to factor in inflation, the equation would look like:
s – c*s = (p + a*p) * (1 + i)n
Where i = the annual rate of inflation and n = the number of years between purchase and sale. If you assume 2% inflation (based on current estimates for the next 10 years), and assume a 3 year period between purchase and sale, then the required sale price becomes $234,820.
Again, not something I want to count on.
We rent a place that fits our needs, not our wants
When we eventually buy a house, it will certainly be nicer than our current apartment. Our current place fits our needs, but there are things we don’t like but choose to tolerate because we know it’s a short-term solution, not a long-term commitment.
Because we’re okay renting a place that isn’t as nice as what we would buy, we’re saving even more money. Our monthly cost if we bought would definitely be higher, and in the meantime we’re able to use that extra cash flow for other purposes. With a short-term mindset, this is preferable to us than having a nicer place for the next couple of years.
We’re willing to wait
All of the above shows that buying a house would likely to be a pretty bad financial decision for us. But we all know that buying a house is more than just a financial decision. It’s a place to call your own, to raise a family, to be your home. And if you stay there for a while, it can end up being a good financial decision, even without much price appreciation.
We want all of those things, but the simple fact is that we’re willing to wait for them. For us, the short-term sacrifices are worth the increased long-term financial security.