Rent or Buy… Evaluating Housing Options
Stay or move… Rent or buy… ???
You may have found yourself evaluating these options before… if not its likely that one day you will. This post dives into our family’s evaluation of housing option and what finally decided.
In a previous episode of Murphy On Money that my wife and I were saving up to move closer to downtown Raleigh. Right now we own (with a mortgage) a townhouse which is nice but it’s not by our work, gym, church, or other social activities we enjoy. We are sort of there by default. You see, a few years back my wife’s office moved downtown and now there’s really no reason for living where we are except that we own it.
There is something called a sunk cost analysis and at its core, it means you don’t let past decisions affect your current decision. One way to use this in our situation is to say, “if we didn’t own our home today, and were shopping for homes, would we buy it at the price we could sell it for today?” We found that the answer to that question was, no, we wouldn’t.
So we assumed that meant we would be buying something else closer to downtown but what did we want?
My wife and I wanted to buy something that would also bring an opportunity to provide rental income. Properties that fit this criterion would be a duplex or a single family home with an apartment over a detached garage or something like that. A property that we could live in, rent, and manage closely. The idea being that it would be our baby step into owning rental real estate.
However, after searching for awhile and speaking with several realtors we realized buying something contingent on the sale of our current home would be nearly impossible in this environment especially on properties like I mentioned.
What were we going to do? We saw two options:
1) Sit tight and wait to buy.
This would take awhile since we couldn’t use the equity in the house for the down payment. However, our savings rate is good in this house because the mortgage payment is fairly low. The bummer this option is it would take years for us to move downtown.
2) Sell and rent downtown.
Since we couldn’t rent something downtown for the same price as our current mortgage this would slow down our saving rate but it does free up the equity we currently have in the house. Another thing we liked about this option is that it would allow us to get downtown right away.
What did we decide to do?
Drum roll, please….. The Murphy’s are selling, moving and will soon be renters downtown.
It seems crazy, right? Renting instead of having a mortgage? I know so many people that think this decision is very unwise and I can’t fault them for thinking that. We even had to mull it over for several weeks. Finally decided that it wasn’t unreasonable, although our monthly housing expense would go up, the rent expense will be less than 20% of our take-home income even after giving 10% and saving 15% towards retirement.
Lastly, I have one little thing going in the back of my mind. You may have heard that our economy is cyclical.
If you want to learn a little more about that you can watch Ray Dalio’s video “How the Economic Machine Works”. It’s a great explanation.
Anyway, we know is that since 2008 things have been pretty good and actually all signs are positive as I write this. Still, we know hard times will come again but no one really knows when. If something does happen in the next few years, I like the fact that we’ll be moved out of the place we no longer wanted to live and we’ll be cash flush at a time when buyers are scarce. Heck, maybe that will be a great time for us to buy… we’ll see how that goes.
For now, we’ll focus on our next adventure, selling our house FSBO. Have any of you done this before? We are accepting any and all pointers, please!
Stay tuned and I’ll let you know how it goes.