Buy vs. Rent Question...

Leveraging, renting vs owning, making an investment or buying a home?
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SunnyDaze
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Buy vs. Rent Question...

Post by SunnyDaze » 04 Dec 2016 14:10

First time poster here. I realize this is a Canadian forum and I live in Los Angeles, but this seems like a great forum and I'm looking for opinions on the Buy vs. Rent question.

My situation:

• Freshly divorced w/ a 14yo daughter who is a freshman in HS.
• I owned a home for 18 years that had to be sold as part of the divorce on which I made a huge profit.
• I will have about 225-250K to use as a down payment.
• My target price for a home is 500-525K (which doesn't buy much in LA).
• I only have to live here until my daughter is out of high school, so I MUST stay here for about 4 years. Then I can sell and move to a more affordable market
• My income fluctuates greatly because I'm freelance.
• I have always hated the idea of paying rent, which is just someone else mortgage. But maybe staying liquid is good right now - not sure.
• My main goal is to have a low monthly cost of living, and it seems a mortgage with my size of a down payment would be a lot less than rent.
• Here in the US, the mortgage interest you pay is deductible on your taxes (not sure if it is in Canada).

My questions...

1. With the above situation is it worth buying for a 4 year window?
2. Would you advise buying a home, or renting and putting the money into other things like stocks (I did a lot of investing and was lucky with tech stocks - but lost a lot of it in the divorce)
3. Any other thoughts or ideas come to mind?

Thanks in advance for your input and any help you can offer.

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AltaRed
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Re: Buy vs. Rent Question...

Post by AltaRed » 04 Dec 2016 17:28

You have to look at what will be your transaction (closing) costs if you buy now and sell again in 4-5 years. Usually that is not long enough to get enough equity gain to make buy/sell cost effective.

Further, being freshly divorced, I'd advise renting until you sort out where your life is headed. Give it the 4-5 years to sort itself out. You never really know what curves in the road will come your way. When I divorced in 2008, I thought I had some idea where my life was headed, but within 4 short years, it took a (pleasent) turn that I would have not contemplated at the time.

Also, even in California, it is possible housing prices could dip in the meantime. Who knows what effects, if any, that a Trump presidency will have.
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Just a Guy
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Re: Buy vs. Rent Question...

Post by Just a Guy » 04 Dec 2016 19:58

First off, Canada is really big and you don't mention which area you're planning on moving to. The market varies a great deal across the country.

Second, with a 4 year window, you are setting yourself up to lose money. The closing costs, interest rates, and the costs to resell usually takes about 10 years of normal appreciation just to break even.

Finally, I gather you won't know the area very well, so it's usually a better idea to rent until you know where the "good parts of town" are.

As for interest on your home, it's not tax deductible in Canada, but there are no capital gains on your primary residence when you sell.

Also, not sure why you'd be coming to Canada just so your daughter can go to high school...

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AltaRed
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Re: Buy vs. Rent Question...

Post by AltaRed » 04 Dec 2016 20:02

Think you mis-read. The OP is in LA and isn't coming to Canada.
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SunnyDaze
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Re: Buy vs. Rent Question...

Post by SunnyDaze » 04 Dec 2016 22:09

AltaRed wrote:You have to look at what will be your transaction (closing) costs if you buy now and sell again in 4-5 years. Usually that is not long enough to get enough equity gain to make buy/sell cost effective.

Further, being freshly divorced, I'd advise renting until you sort out where your life is headed. Give it the 4-5 years to sort itself out. You never really know what curves in the road will come your way. When I divorced in 2008, I thought I had some idea where my life was headed, but within 4 short years, it took a (pleasent) turn that I would have not contemplated at the time.

Also, even in California, it is possible housing prices could dip in the meantime. Who knows what effects, if any, that a Trump presidency will have.
Thanks for the reply. Good points about not knowing where life will lead - I just always HATED the idea of throwing away money on rent... but maybe the flexibility is worth something.

Regarding fluctuating home values in Los Angeles...

Interestingly, there was only one 3 year period during my last 17 year ownership that was a down cycle; the years right after the housing crash. But other than that, every year was an increase in value. Most areas of LA are perpetually on the rise.

The main point I was thinking of was if I put down 225k on a 500k home, my mortgage payment would be about 1k-1.5k LESS than your average rent. But maybe if I aggressively put that money to work elsewhere then I could justify the expense of renting. I thought that there'd be almost no way to lose the down payment and if I worked on it (I'm a DIY guy) I'd gain equity through increased value and paying down the mortgage.

Another forum I asked the same question on was very pro-renting over buying. This is all good food for thought and I continue to welcome input and ideas. Thanks for your time!

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AltaRed
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Re: Buy vs. Rent Question...

Post by AltaRed » 04 Dec 2016 22:36

SunnyDaze wrote: But maybe if I aggressively put that money to work elsewhere then I could justify the expense of renting.
There is no certainty of making money elsewhere either, e.g. the stock market. My main point is whether it makes sense to have a boat anchor around your ankle (owning a house) that may dissuade you from making unbiased decisions on some of life's options. Personally, I am indifferent to renting vs owning so I would be more interested in the 'freedom of options'.

However, only you can decide if owning RE for the duration of your child's high school education is worth the stability it will likely bring for your daughter over the near term.
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Just a Guy
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Re: Buy vs. Rent Question...

Post by Just a Guy » 05 Dec 2016 01:06

Ahh yes I did misread that, it makes more sense now.

As for the rent vs. Own debate then, I'd ask what you would do with your downpayment if you didn't buy.

If you make a big doenpayment, the money basically sits there and doesn't really earn anything. It's a guarantee against depreciation for the bank of course.

The home itself will appreciate or depreciate regardless of the downpayment. So, if you put $50k down and the house appreciates $50k after expenses you double your money, but if you put down $225k, it still only appreciates $50k for a poorer return. It's better to put the minimum down and invest the remainder, even if you only earn a few percent.

You could put a smaller deposit down and invest the remainder, which may increase your returns. The more money you have working for you the more money you can make.

The other option is to rent, paying out a smaller portion and invest the majority. If you made 5% return on $225k you get $11,250/year. Not sure what the rents are currently in LA, but that's a good chunk I'd imagine.

Those are some scenarios to look at. In real estate you make money from the leverage, so paying down your mortgage, especially in the USA where the interest is a tax deduction, isn't the smartest way to go.

Of course, if you're just going to spend the money, or plunk it in a bank account earning next to 0, letting inflation eat away at it, it's probably safer to pay down the mortgage so you can't spend the money.

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Re: Buy vs. Rent Question...

Post by SQRT » 05 Dec 2016 09:51

Agree with previous posts. I would only add that it will depend to some extent on your personal attitude towards control, ie do you want to have control over your housing? Ie redecorating, having to move, etc. If this isn't important to you, renting makes sense. After my divorce I rented for a number of years until the landlord sold the place and I had to move. Been an owner ever since. Good luck, it's a tough time emotionally.

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Re: Buy vs. Rent Question...

Post by gobsmack » 05 Dec 2016 13:59

OP may find this calculator helpful.

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kcowan
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Re: Buy vs. Rent Question...

Post by kcowan » 05 Dec 2016 14:53

I have this investment opportunity for you. It requires a minimum of $300k and has a trailer of 5% to 8% fee. It will make 3% more than inflation if you hold it for 15 years or more. And there is a good chance that you can get a positive cashflow along the way by the amount that rent would exceed maintenance, taxes and fees.

Are you interested in this type of illiquid investment?
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Just a Guy
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Re: Buy vs. Rent Question...

Post by Just a Guy » 05 Dec 2016 15:56

Since it's his home, there is nearly zero chance at a positive cash flow, more like a monthly maintenance fee for the life of the investment and a capital gains hit on any profits (he's in the USA).

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kcowan
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Re: Buy vs. Rent Question...

Post by kcowan » 06 Dec 2016 08:39

He would get the rollover provision as long as he buys another house. But eventually he will pay when he retires or dies.
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8Toretirement
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Re: Buy vs. Rent Question...

Post by 8Toretirement » 12 Dec 2016 16:03

AltaRed wrote:You have to look at what will be your transaction (closing) costs if you buy now and sell again in 4-5 years. Usually that is not long enough to get enough equity gain to make buy/sell cost effective.

Further, being freshly divorced, I'd advise renting until you sort out where your life is headed. Give it the 4-5 years to sort itself out. You never really know what curves in the road will come your way. When I divorced in 2008, I thought I had some idea where my life was headed, but within 4 short years, it took a (pleasent) turn that I would have not contemplated at the time.

Also, even in California, it is possible housing prices could dip in the meantime. Who knows what effects, if any, that a Trump presidency will have.
Wise words. I would also trend toward the flexibility of renting. 4-5 years is too short a timeline to invest in a house. I am conservative so I would place the funds in guaranteed investments until I had fully developed a plan of action.

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