This is a bit of an exercise; who knows when I’ll be financially stable enough to own property, but I’ve often wondered about whether it would ever make sense to buy a house with cash, or how easy that would be.
Let’s say I wanted to spend $300,000 on a house. It seems that within the next 30 years there will continue to be houses around here I’d want to live in that would fall in that price range.
If I wanted to buy in, say, 2030 (22 years from now), I’d need to have accumulated an average of about $13000 a year. Now, if I’m investing that money, I clearly wouldn’t need to necessarily put away that much each year.
How much money would I need to be socking away. And since I’d have to live somewhere in the mean time, I’d be spending anywhere from 7-14 thousand dollars a year on rent.
I think that if I can afford that $13000 a year plus rent, then it would just make sense to save for a few years and get a loan. Am I right?
where
S = the future value (300,000 in your case)
R = your annual contribution
i = the interest rate on your investment
n = the number of years (22 in your case)
If we choose a relatively conservative, low-risk after-tax return on investment of 5%, you must invest $7,791 per year to have $300,000 after 22 years.
I’m not sure what you mean. Buying property, even with a mortgage, is usually better in the long run than renting–unless you are living in an area with severely and temporarily over-priced property.
One problem is that if you have $300,000 in 22 years, that probably won’t be enough for your down-payment of a house that is worth $300,000 now. Over the long term, houses go up in price. So I’d be one more vote for saying buy as soon as you have enough saved for the down payment and enough income to pay off the mortgage (and pay taxes and other incidentals).
I’ve bought (either solely or with others) four houses, each time borrowing money, and each decision was the right one – even the one I;m living in now, which has its value slipping because of the sub-rime crisis. My worst financial decision was one I made about 10 years ago, not to buy a house or flat in Sydney, Australia, because prices seemed too high to me: if I had borrowed as much as possible, and bought something, I would actually have made a profit out of it after only two years. But that was an exceptional case: mostly my buying houses has been right over a longer term than that.
If you have the cash, long range, you’re better off paying $300,000 up front for full ownership than $550,000 over 20 or 30 years (the extra quarter million being interest and fees) to finance through a mortgage. On the other hand. will investing the $300,000 (or the $240,000 left after a 20% down payment) bring you more money than you pay out in mortgage payments? If so, and if you’re sure the income to pay the mortgage will always be there, you may be financially ahead to go with the mortgage.
Remember that if you have a $300,000 house that you’'ve put 20% down on, you have a $60,000 equity in it. If you have a $300,000 house you own free and clear, you have a $300,000 equity in it – and the knowledge you have a permanent home that you are, subject to any zoning laws, HOA agreements, etc., the sole authority over. This may be of value to you in a non-financial sense.
Watch out for the tax-deduction semi-myth! That only works if you itemize your taxes. If you take the standard deduction, it’s useless.
Also consider that any landlord is going to charge you more than the mortgage of the property he’s renting you. That means that your money goes farther in a bought house than a rented one. Factor that into your “quality of life” comparison.
Why would anybody with a mortgage NOT itemize their taxes? For me, once I bought a house, there was no comparison between the standard deduction and itemizing.
That’s not always true. Right now, for example, in a lot of places, it’s sure as hell not true. A landlord is going to charge reasonable market rates for rent. If he tries to charge more than that, he’ll quickly find that he has no tenants. The rate will often be less than his mortgage, because most landlords are in business to turn a profit. But it’s not universal. Some landlords are failed speculators, some have an emotional attachment to the home, and some overpaid for the property in the first place, and are taking a loss on it.
Don’t forget that as the years go by you’re paying less interest and more principal (on a traditional loan). Eventually you get to the point where the amount of interest you pay over a year is less than the standard deduction and it’s no longer prudent to itemize your mortgage interest.
Also, there are areas of the country where houses just aren’t that expensive, still: my three-bedroom house in Dallas was under $150K: we have a 5% fixed mortgage (only time in my life I ever got the timing exactly right) and even the first year it wasn’t worth itemizing).
In 1998, I was a single guy in WV, and bought a house for $43k. It was a nice fixer-upper, and I still have fond memories of it. But I never paid enough interest to make me itemize.
Now, my Florida home that I bought two years ago, MORE than makes up for the itemization
Besides mortgage interest being deductible, property taxes are also. That’s in your rent, but you’re not getting anything for it.
The real reason to buy, most times if not now, is that your down payment is leveraged. Say you pay $100K down for a $500 K house, which increases in value to $700K over 15 years. Your gain is $200K - interest and taxes + equivalent rent. Assuming rent and interest are roughly identical, you get a 200% gain on a 40% increase in price. You can also lose, of course, but most of the time this is advantageous.
Or they’re waiting for equity to build up again. I considered renting my last house rather than selling it, even at slightly less than the mortgage and enhanced insurance payments (insurance is really what put it over). Supposedly it would have kept appreciating, even more than the net loss. In retrospect (crash), I’m glad I didn’t try to be greedy (but kind of regret that I didn’t take a risk).
This is the sort of thing that depends strongly on one’s personal situation. The amount of money I pay in state income taxes, all by itself, is greater than my standard deduction. So no matter how small my mortgage interest becomes, I can always deduct it.
I’d like to focus on this assumption.
Although I am in England, house price inflation is everywhere in the long run.
(I’ve converted all prices below into dollars.)
For example, my parents bought a house for $5,000 in 1950.
45 years later, they sold it for $500,000.
During a crazy inflation year, I bought a flat for $60,000. I sold it 1 year later for $80,000.
I bought my current house 20 years ago for $120,000. it’s been estimated at $400,000 now.
Ignore the whole ‘I paid X for it and now it is worth Y’ garbage.
If you own your own house free and clear, ALL YOU HAVE TO SCROUNGE UP IS TAX< UTILITIES AND MAINTENANCE.
If the job market tanks, and all you can get is a McDeathburger job, you can probably afford to stay where you are. If you have the money for a years taxes and utilities, all you have to really scrounge is food and job hunting money.
One of the main reasons for all the forclosures of farms in the depression was using borrowed money and not having a crop due to bad conditions. My grandfather owned his farm outright, used horses to plough it, didnt get into the whole borrow money to get into the stock boom, nor buy that spiffy new mechanized combine thang that was prevalent in the midwest, and came nowhere near losing the farm. Kept 5 kids clothed, fed and in school and was able to save money. I know people here on the east coast that owned property outright, and despite losing their jobs, their families simply went into survival mode and grew their own food, and traded for what they couldnt grow. Didnt lose the property.
To be honest, mrAru makes just enough with is navy pension to actually cover the taxes and electricity for the place if we owned it outright, and with just over 2.5 acres, we can grow enough to eat fairly well [if vegetarian.] We got lucky when we bought the place in 1991 and have a decent fixed rate mortgage that we can afford, and it will be paid off in about 5 years [faster if we were to start making extra payments against the principal again.]
Actually, in Indiana rent IS tax deductible. Granted, it’s only state taxes and there’s some other qualifiers (love my accountant for finding this for us) but your statement is not entirely true.
