In Today's economy:Rent or Buy?

In My Humble Opinion
1

A general and then a specific question, If all other things were equal, would you rent or buy for the next 18 months? I have asked this question of many friends but would like to tap the massed wisdom for some new considerations.

I need to relocate to a new location. I will need a fairly large place, most likely a 3 or 4 bed house. Given the current economy in the US, including all the government manipulation of markets going on, do you buy now, or wait for the smoke to clear?

If it makes a difference to your opinion, the specifics:

I own a home in a Chicago suburb which I will be renting on a lease-to-own contract. For 18 months the equity (of which thank Dog I still have some) will be tied up. In the meantime I need a home. Rental prices in my target market (Denver area) seem very reasonable by Chicago standards.

I could possibly raise 4-5% for an FHA down payment by selling some investments not doing too well anyway, but would have a hard time getting the 15-20% needed for a standard mortgage. Qualifying for the loan on income will be close, but I think I can do it. (My wife is very talented and makes a good income)

So do I rent until the option is exercised and I have the cash, or do I stretch and buy a second home (with minimal equity and significant chance of decreasing value) at this time?

I realize my predicament is not likely to gather too much sympathy given what many people are going through, but I would value the combined opinion of the teeming millions whom I have read, but not posted to since before this incarnation of the board.

Oh, by the way, I have about 60 days to find a new home.

Thank you.

(to mods: This seems like a great debate to me, but please move if necessary)

2

Well, a lot depends on where you are going. Do you intend to be there a while? What are prices like? If they’ve bottomed out, you may want to buy in the hopes of prices rising later, but again, it depends. What kind of employment is it? Fairly reliable?

3

I would rent. The following is random opinion:

  1. You really don’t know the Denver market, area, etc. You should spend some time there before you buy, so that you can make friends with folks from a lot of areas who might tell you about some neighborhoods that you “wished you would have known before you bought.”

  2. The RE market is still screwed up. I don’t think you would be missing out on much appreciation.

  3. You don’t have the cash right now - so buying could be very stressful.

  4. The risk of default, etc. could totally kill you.

To me, the risk vs. reward calculation (especially if you might not stick around in Denver) makes it worthwhile to rent.

4

[Moderator Hat ON]

I think this will do better in IMHO, since it’s about a very particular situation. Off you go.

[Moderator Hat OFF]

5

I agree with all of this. Even if the RE market turns around some in the next 18 months (I am convinced we are still 6 - 12 months from the bottom, but that’s just my own intuition), it won’t be a huge wild swing that you will kick yourself for missing out on. It would more likely be a couple of percentage points, tops.

The risks of buying far outweigh the rewards here. Especially because you are counting on someone fulfilling a contact to purchase 18 months from now, in a market that’s uncertain to say the least. Anything could happen in those next 18 months, including your renter’s filing for bankruptcy and loss of rental income to cover the payment, which could totally kick you right in the nads.

6

Real estate professional here. The market may turn around in about a year, but until then I would recommend leasing. If you buy and you don’t like the area or have to move, you’re going to be up the creek. If your tenants don’t pay the rent, you’ll have two mortgages. It’s easy to rent now, but it’s tough to get a mortgage.

Rent for six months, with an option to renew for six months. See what is happening in October.

7

No way would I buy even in the best of times for 18 months and certainly not in the current climate. I don’t think that you’ll be able to gain enough equity in the home to break even when it comes time to sell (since you’ll have to deduct fees for the Realtor and such).

If you were going to be there longer, I might have a different opinion, but even then I might suggest that you rent for about 6 months to get a feel for the city before actually buying a place.

8

We were in a similar position. We own a condo in Atlanta but moved to Sacramento last year. We would have taken a huge hit if we tried to sell the Atlanta condo, so we currently have a tenant in it. Since we eventually plan to go back to Atlanta, and under no circumstances want to be stuck with two mortgages, we are renting in Sacramento.

I would never own more than one place at a time, so there is no way we would have bought in Sacramento. Based on the situation as you describe it I can’t imagine owning two places is a good idea for you, either.

Actually, in hindsight, based on market conditions and the opportunity to move to California, we really ought not to have bought the Atlanta condo. We’ll be okay, and can easily afford it, but we’d be doing even better without it.

9

Thanks all for the comments. You kind of backup my gut instinct. I’m a cash-first gold buying conservative, and the thought of all that debt does scare me bit.

But.

Let me point out a couple factors in favor of buying.

[ul]
[li]I have done a bit of homework and the area in question shows strong signs of having bottomed out. New construction is up, prices over the last 3 months up not down. Not that it won’t drop, not that it can’t, but from a Chicago perspective it looks pretty healthy.[/li][li]Moving twice is expensive and a PITA. The couple thousand a moving company will charge translates to a couple hundred a month in payment or equity.[/li][li]Interest rates are gosh darn low. I am seeing sub 4% rates for well qualified buyers.[/li][li]The tax advantage of ownership in our situation is pretty good. That mortgage interest deduction helps a lot come spring. Or January, as I always do taxes first thing.[/li][/ul]

So add these up and look at it from a cash flow perspective, house per $100 per month, and the situation is not so clear.

OTOH, with so many people renting their houses for exactly the same reasons as me, the rental market is quite reasonable as well.

I would like to address the comments regarding staying in the area and job prospects, but honestly I have too much angst over moving in the first place to even consider that this might be temporary.