Another question! (can you tell I'm trying to avoid my work today?)As I crunch numbers on buying a single family home, one of the factors I'm trying to reckon is the financial advantages of renting vs. buying. I know there are a lot of factors involved here (& I've tried to count all of them) but there is one issue in particular that I thought of today that I'm curious about.Say, for the sake of argument, that counting all factors including taxes, maintenance costs, etc. I exactly break even on how much I pay for rent each month vs. how much it would cost on a monthly basis to buy (as of next year). I am trying to decide whether in that case, on a purely financial basis, I am better off renting or buying (excluding any emotional factors), especially if I end up selling between 5 & 10 years from now.My current rent increases 4% annually. A monthly house payment would increase somewhat (property tax increases etc) but probably not nearly as much. On the other hand, buying would set me back for closing costs, & selling costs if and when I sell.My question: In an AVERAGE situation, how much does real estate appreciate each year? Of course I know that random factors can cause housing values to go way up or way down, just like the stock market. Let's assume an ideal world where no weird factors are operating, and where average inflation/real estate appreciation is the only factor. Assume a single family house in a suburb of Hartford, CT. What would the annual percentage appreciation be, over say the next 5-10 years?Thanks so much for all your answers to my many questions! I am finding the replies on oil vs. gas very reassuring. I guess I just grew up with gas heat & don't trust anything else, so it is good to hear the experience of those who have used oil.Tanaquil
(can you tell I'm trying to avoid my work today?)Hoo Boy, can I relate! :)As I crunch numbers on buying a single family home...I can really relate to that...I've been "geeking out" (as my DW calls it) for weeks on this subject...When I've done similar calculations, I've used the same number for rent increases as real estate appreciation...I felt like that was "fair" and didn't give either renting or buying an advantage...but it might not be very realistic.I've been using 3% for both calcs...including the increase in taxes...which of course is only one portion of your payment.On a related note, I recently wondered whether it made sense to wait until we had our debts paid off before we got a house, so I figured out what our change in net worth would be in the 2 situations, renting or buying.I used 5 things in the analysis: housing (rent or PITIXYZ), 2 car loans, school loan and the credit card. In the renting case, we had all the debts paid off in about 3 years and then I started to just add up the extra and pay it 5% interest. In the housing example, the school loan was not paid off yet (but all the others were) but we had equity in the house to bring us into the positive.The change in net worth was very close (with in a few $100)....which to me means....BUY, BUY, BUY...because if the financial pictures are nearly identical, all you have left are the emotional, social, etc. issues, which for me includes getting out of the apartment as soon as possible.Sorry for the long post...if anybody is still reading...THANKS!-Cal
<<In an AVERAGE situation, how much does real estate appreciate each year? >>About the same as the inflation rate.Not something that pepole who lived through the 80's real-estate boom will believe, though. They believe that realestate can grow at 10%+---never realizing that this happens only when something like the baby-boom demographic bulge hits the market. Baby boomers all became adults, got married, had kids, and bought houses. But that's over now. The bulge has passed through and the extraordinary surge of unusually large house buying is over. We're back to the normal growth rate now.BTW, houses in-and-of themselves do NOT become more valuable. They actually become less valuable each and every year, as the bricks and boards and nails deteriorate. It's the land that becomes more valuable, not the house.So......by a house as a place to live in, not as an investment. You have to live somewhere, and owning your own house has many psychological benefits that have nothing to do with monetary costs or benefits.Of course, buying a house means that you have pretty much frozen the cost of your housing, which is a Good Thing. (Except, of course, for the government taxes, which have a habit of going up continually.)This only works if you stay, though. The transaction costs of buying & selling is horrendous. My rule-of-thumb is 5% when you buy, and 10% when you sell.Ray
Appreciation is such an elusive creature. Back in the late 1970s and early 1980s, real estate in southern California experienced explosive appreciation. You could buy a single family home, sit on it for three years and make ten grand.Everything moves in cycles.The 1986 tax reform act hit real estate hard. Although this legislation primarily affected invesment vehicles such as rental housing, the trickle-down factor applied. It was just the tip of the iceberg when property values actually declined in the early 1990s.I don't know about Connecticutt, but in the Midwest, real estate values have skyrocketed in the past five years. Many property values have doubled. It's just another cycle.You do the math. If a house was worth $60,000 in 1991 and it is worth $225,000 today, what is the average appreciation rate over the last 10 years?Alas, there are no guarantees in life, but I still believe real estate is one of the best investments a person can make, regardless of whether one occupies the property as her residence.elizabeth
Original Post, Excerpt--My question: In an AVERAGE situation, how much does real estate appreciate each year? Of course I know that random factors can cause housing values to go way up or way down, just like the stock market. Let's assume an ideal world where no weird factors are operating, and where average inflation/real estate appreciation is the only factor. Assume a single family house in a suburb of Hartford, CT. What would the annual percentage appreciation be, over say the next 5-10 years?********** I have heard that when you are purchasing a home to live in, you estimate "returns" (i.e. anticipated appreciation) conservatively: that is, your assumption is that the market value of your home will remain the same. You do not assume appreciation. This is especially applicable on a five to ten year time horizon. In fact, if you are buying in a "hot" market, as seems to be the case right now, you may find that in five to ten years, the hot market has cooled off. If you were buying a rental property, there are several standard valuation methods that you could use, but that is not applicable apparently here as this is a home for your own use. I have also heard that your average maintenance costs are around one percent of the sales price of the home. This is a very rough rule of thumb. Also assume total closing costs of 8% to 10% for each transaction. The way I would do it would be as follows: 1. Buy house in April 2001 for $150,000. 2. Put 10% down w/additional closing costs of $4,000. 3. Yearly maintenance on house x 5 = $7,500. 4. Throw in $3000 - $5000 extra expense when you move in, for new furniture, carpets, shades and all that other stuff that women like. Only applies if you're married. If unmarried male bachelor, you will use the empty cardboard moving boxes for furniture. (Hey, am I a sexist, or what?) 5. Sell in April 2006. If you had a 30 year fixed mortgage at 7.5%, for $135,000, your loan balance will be about: $128,000. Your monthly payments (principal and interest only) about $944. Does not count mortgage insurance, property taxes utilitites, which could easily add on another $300- $500/month during this period. You will have paid about $50,000 in mortgage interest over this period. Whether you get a benefit from the deduction and how much is a good question. Assuming you're in the 28% bracket, and that you are already itemizing and that therefore you're not simply cancelling out your standard deduction by itemizing your mortgage interest, your averaging about a $2800 yearly tax savings. Maybe. The tax deduction in this case does not really seem like a big enough deal to drive the decision. 6. So, let's say the house has not appreciated in five years, you sell for $150,000. Let's say you pay a 6% broker's commission, plus you give one "point" to the buyer, plus there's about $2000 worth of stuff the buyers make you fix in order to close the transaction. $1350 (the "point") plus $2000 plus $9000 (broker's commission) = $12,350. 7. 150,000 minus loan balance of $128,000 minus sales costs of $12,350 equals a net of $9,650. 8. However, remember, you put $15,000 down originally plus paid down $7,000 principal via mortgage payments, or $22,000. Therefore your net LOSS, without computing all your other expenses as noted above into the transaction, is: $12,350. 9. Oh, wait a second--I forgot, you now have to BUY a house to live in, because you just sold the one you were living in. 10. Let's see, multiply the above by Two. 11. Oh yeah, now you have to hire a moving company to haul a house full of furniture across town or across the country. 12. Oh yeah, now you have to get all new furniture etc. 13. The house could appreciate; but remember, it could DEpreciate in market value. So, have I encouraged you?
in southern california, especially in those places without rent control, the difference between renting and buying in negligible.(for a 2/2 condo($170K), renting is $1200, buying is $1500 per month. the difference is about $300, including property tax, PMI, HOA fees and excluding the tax benefit. so after tax benefit, its about the same.)rents are increasing about 5-10% a year, and property values about 10-20%. so renting will always be cheaper than buying. but the question is, with salaries not keeping pace, will you be able to afford even to rent in a few years???we can see the prices in the bay area have forced people to be renters since a majority of them can't afford $300,000 for a 2/2 condo. will this same phenomenon affect southern california or the rest of the country as well?? it might. my advice is get in while you can. world population is rising. there's only so much land... especially in california!
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