Financial disacuity

Miscellaneous and Personal Stuff I Must Share
301

The condo we own, it’s not bad, but we pay an assessment of about $6000 per year that covers utilities and the such. Taxes we pay ourselves. I can’t remember the exact amount, but something around $1500. So that’s $7500/yr for that property. (This one we rent out, so do come out ahead, but I’m just giving the numbers for cost when living there.)

The house we live in, taxes are around $2500/yr. Electricity, cable, water, and heating add up to probably around $400/month (last month, heating alone was $250.) And then general upkeep, so far, has averaged around $1500-$2000/year. So that’s about $9000-ish per year there. And we live in a very affordable house for the city, modest size, 1200 square feet (not counting the unfinished basement.)

302

If your property increases in value, so will the property taxes. Localities can also tack on fees to your property taxes (google “rain tax”) that you can’t always anticipate. And as your property appreciates, your homeowner’s insurance rate will go up.

New houses deterioriate over time. You may be able to get away with budgeting a small amount of money for repair/maintenance for those first few years. But eventually shit starts to break. Paint starts to wear. Porches begin to sag. Septic tanks need to be pumped (and then they leak and need to replaced). So your custodial costs also increase the longer you have the property.

Families have a tendency to expand over time. The unfinished basement that worked well when the kids were small suddenly seems like a huge waste of space. You could refrain from finishing it just so your housing costs would stay the same. But that would be crazy. So your housing costs go up (temporarily) so you can give the kids a romper room. Then your house gains value –> higher taxes. (And now that ya’ll are going to be hanging out in the basement, your utiitiy bills will likely go up. And you will need furniture for the room, too.)

The advantage the renter has is that when the cost increases get to be too steep, they can easily hightail it to cheaper digs. A renter doesn’t have to protest at the board of supervisors meeting when a new tax bill is on the table. If they are sick of the bathroom tile, they can go someone else where the tile is better…and only have to shell out for moving expenses.

303

You’d better not go on vacation, then. Otherwise your boss might see your pictures and give you a raise and a promotion, and then you would have to pay more income tax.

Regards,
Shodan

304

I will add that low-income homeowners are often screwed when their houses increase in value and they can no longer afford the taxes. This is the number one reason why gentification is seen as a negative thing.

“Your house payment stays the same!” would not be a smart thing to tell someone who is uncertain about homeownership and what it entails. IMHO.

Shodan, in your attempt to zing me, you’re actually making my point. If I get a promotion, my taxes will go up. But the increase in my salary will likely cover the difference.

If my salary stays the same and I have an appreciating asset, my taxes will go up but I will not have the extra income to cover the difference.

We’re supposed to be advising people who make poor financial decisions, right? Well someone who makes poor financial decisions is probably not all that great with saving. So I would not advice someone who doesn’t plan well to buy a house that’s expected to appreciate faster than their income increases.

305

As always, it depends. Here in California property tax increases are strictly limited by law.

The bottom line is that, in my own case it was a very good decision to buy my house in the San Francisco Bay Area 17 years ago. All things considered I’m paying far less than I would be if I were renting the equivalent house today.

306

The problem is that, unlike a salary, you can’t easily take a proportion of the new value and set it aside to pay the increased taxes. If my house appreciates 10%, can I sell 5% of it to raise money to pay the increased taxes and save the rest?

307

Of course. But also of course is the fact that laws (especially tax laws) change. Here in the mid-Atlantic, the cries of homeowners have been especially loud as localities try to fund environmental legislation any way they can. We’re seeing fees that no one would have predicted twenty years ago.

This article is kinda interesting California homeowners see big tax bill:

308

Once again, guys, there is a middle.

You don’t want to live like a miser, hording cash, never take a vacation or own anything nice, and die with millions of dollars.

You also don’t want to spend like there is no tomorrow (unless maybe you have a terminal diagnosis and a few weeks to live), get to retirement age with no savings an not enough quarters of social security to do anything and end up saying “Welcome to Wal-Mart” when you are 90. Or just have to declare bankruptcy because you are in over your head and can’t dig out.

With the exception of those below or at the poverty line (and probably those slightly above it as well) who really cannot make ends meet, most of us have disposable income after the rent or mortgage (whichever fits your income and lifestyle) is paid, the bus pass or car insurance is taken care of, and you’ve bought groceries or eaten every meal at McD’s off the dollar menu. Once food, shelter, clothing and transportation is taken care of at a minimal level, there should be money left (assuming - again - that you are not at poverty level.)

Financially wise people set a little of that money aside - and that’s what this thread is about. But normal human beings - including the financially wise - also spend that money on things they want - it might be a nicer place to live and better food. It might be an Audi TT Turbo, a 3000 square foot house and a 3 month vacation in France. It depends on what sort of money they have left. If you have enough money to both be financially responsible by setting some aside for emergencies and your future, and you still have enough left for hookers and blow - congrats!

The issue is when you spend everything on hookers and blow and then not only not having set anything aside, you have spent the rent money. And it doesn’t matter if its hookers and blow or something far more useful.

So if it isn’t binary its a sliding scale

Save everything and have no fun = bad
Save something and have some fun and luxuries = good
Don’t save anything and have lots of fun - bad
Don’t save anything and have so much fun that at the end of the month you can’t pay your mortgage or rent = really bad

As for the idea of investing in yourself - certainly that is a worthwhile activity - but its not a financial activity - generally you don’t get ROI on a vacation or a manicare or a bath with a glass of wine - you might on an education. But its a different sort of calculation that with only a few exceptions, isn’t part of a discussion on financial astuteness. Most often, you’ll spend more than you get in the end out of it (sometimes even with education) - financial investments you make because you expect a return on them (you may not always get it, but you don’t make them planning on losing money).

309

The real estate tax/gentrification thing varies- my real estate taxes are low and don’t go up much because I live in a city that gets most of its revenue from a local income tax. And the renters get screwed by gentrification more than owners, because suddenly people are willing to pay triple what the rent used to be, so of course the rents go sky high. But the thing that amazes me is that people think renters don’t pay property tax- of course you do. You don’t get the bill for it, and you don’t get to deduct it , but your landlord is certainly accounting for it when your rent is set.
There may be non-financial reasons why you choose to rent rather than buy ( maybe there isn’t anything you like for sale where you want to live) , and in some circumstances there are financial reasons to rent rather than buy (you’ve got a rent- controlled 2 bedroom in Manhattan for $500/month or you move frequently or your parents retired to Florida and you’re living in their paid-off house in return for paying the expenses.) But generally speaking, if you’re planning to stay put for a while, it will always be financially better to buy rather than rent the identical house or apartment next door (or down the block or on the next street over). You can’t compare a 700 sq foot apartment and a 3000 sq foot house- because no one is saying buying that house is a better decision financially. Or that buying the 3000 sq foot house is less expensive than renting a 1200 sq ft one. It almost has to be less expensive to buy rather than rent the identical unit next door - if the landlord’s cost ( mortgage, property tax,insurance, repairs etc) is $12,000/year, he’s got to charge you more than that to make a profit. If the property tax goes up $3000 next year, the rent is going up at least $3000. But that’s a floor , not a ceiling- if the mortgage is paid off and the expenses drop to $3K instead of $15K, your rent doesn’t go down.

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Dangerosa, I agree with everything you wrote, really. It’s just that I think people overly fixate on homeowning because you can calculate the return easier than other things. But even that isn’t easy, since people tend not to factor in all the extra costs of homeowning (repairs/maintenance/remodeling/agent fees/taxes (including capital gains)/closing costs) in their calculations. And of course, it is impossible to factor in opportunity costs. If we were really being fiscally conservative, we would find a way to plug those costs into the equation as well.

Re education, I don’t think it’s true that the ROI is all that hard to determine. And I don’t know anyone who goes to college and doesn’t expect to get something financial out of it. It’s true that some people don’t see returns with their college educations. But I suspect it’s probably similar to the same percentage of people who bought too much house or who’d be better off renting.

doreen, I’m not arguing that renters come out on top when it comes to taxes. I’m just arguing that it is simply not true that house payments are any more predictable for homeowners than they are for renters. I’ve had two major repairs to my house over the past two years. My rent has been the same for the past three years. This would not be the case if I were owning this little bungalow.

And if my rent should increase and I can’t pay, I can move. Yes, I am aware that this is an inconvenience. But it is something a homeowner cannot do as easily.

Sorry, if someone is going to lecture me with a point that just isn’t true, I’m going to rebut it. You can argue for homeowning a million different ways and I’ll likely agree with most of them. But consistent monthly payments ain’t one of them. Believing something like this is how low income people who make poor financial decisions (and desperately want to be seen as middle class) get screwed.

311

Well, not really. The renter is building equity for you, so you have to factor that in. With our condo, the competitive rent for the unit was something like $100-$200 less per month than the mortgage and expenses. I don’t think that’s particularly unusual, especially if you bought a unit in the mid-2000s.

312

Here’s an interesting calculator that is supposed to help in the rent vs buy equation, and here’s the accompanying article, which states that there actually are some places, like San Francisco, where renting is a bit cheaper than buying. Here’s perhaps a better Wall Street Journal article that lays it all out, too, and where renting is cheaper than buying (but you do have to invest your money.) As I said earlier in this thread, renting can be the more financially prudent move even for middle class individuals. It’s not a simple case of buying is always better than renting. I happen to live in a place (Chicago) where it is significantly cheaper to buy, though. But if I lived in San Francisco, I’d most likely rent.

313

Doreen is basically saying renting must be more expensive because otherwise landlords would lose money on their investments, which never happens. Except it does happen, often, with all kinds of investments. Sometimes landlords own specific properties that don’t yield a high enough rent to make them profitable investments. A landlord can’t just raise the rent to cover their extra high costs if the market won’t support them.

On the other hand, on a macro scale what Doreen says does make sense. Somebody owns every house or apartment. Landlords ranging from individuals with a few properties, small businesses with dozens, to huge companies owning hundreds of millions of dollars in property. Presumably at some point somebody would notice if, on average, they were bad investments and the tenants were coming out ahead.

314

That’s the situation my condo is gonna be in when I turn it into a rental. Perhaps that’s why I’m sympathetic with the “renting often makes financial sense” side of this debate. It’s going to be a while before my investment starts paying out if it ever does, and there have been multiple times in the last few years I’ve envied renters.

I have to admit having my condo has scratched the same itch that is scratched by indulging in Caribbean vacations. It’s been a pleasure doing what I want with the place and feeling like it’s mine. There is no shame in me saying this because I do believe that money is meaningless if it’s not used to advance one’s quality of life.

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I did say almost.

316

The specific point I’m addressing is that the landlord does not necessarily need to charge more than $12,000/yr if their mortgage+taxes+expenses is $12,000/yr. You can be charging a bit less and still coming out ahead in the long run because that renter is also helping you buy the house. Part of the equity in the property is coming from the rent you are charging, so that needs to be factored in, too. But that’s a bit of a side discussion and only a partial factor in the rent vs buy debate. Just because you can rent for less than mortgage and expenses the landlord is paying doesn’t necessarily mean renting is cheaper in the long run, either.

317

You did, but in my experience it seems to be fairly common. This probably varies wildly by region.

318

What about retirement? Owning a home at that point is a big advantage. Once again, you have to deal with rents that keep going up. With a paid off house you only have taxes and utilities.

There is senior rental property, but you are limiting yourself to the areas it is located. Saving up to buy an affordable house in a good location and paying it off by retirement takes discipline and good planning, both responsible qualities in my book. Of course, it takes a long time to see the fruits of this, which most home owners understand.

People fixate on buying homes because it is a long term endeavor with a lot of advantages for most people.

319

Here, incidentally are the numbers for the rent-to-mortgage payment ratio for the US as a whole. A value of 1 means renting is equal to the payment on a 30-year mortgage on the full value of the home. More than 1 means more rental income than payment. Less than 1 the rental income is short of the mortgage payment. The nation number is 0.84 nationwide as of March 2014, and has generally been below one since 2008 (when the numbers tracking this start.) Yes, I understand this is on the full loan amount, but it does not include taxes, utilities, and general upkeep.

So it’s not that unusual at all that the rent doesn’t quite cover the cost of the mortgage + other expenses.

320

Part of the equation of renting vs owning does involve this. You have to invest the downpayment you would have paid for a house, and investing any money you might be saving by renting instead of owning. That’s part of why a house is very good for most people: because it forces them to do so. But it’s not necessarily the optimal strategy if you are trying to maximize your finances. However, home ownership has a host of other benefits, especially the psychological “comfort” of owning something physical that you can live in.