This is a guest post from RJ Weiss, who is an aspiring financial planner. RJ writes about financial planning for twenty-somethings at Gen Y Wealth. If you like what you see here, please consider subscribing to his RSS feed.
Want to start a fight on a personal finance world? Just ask someone if it makes more sense to buy or rent a home. All of a sudden, you will have a debate like no other.
But should there really be a cut and dry answer to this question? Look at how many possible variables can go into this decision:
- Current state of overall housing market
- Current state of local housing market
- Cost of renting in your area
- Amount saved for a down payment
- Size of emergency fund
- Credit score
- The chances you will be fired from your job
- The chances you will have to relocate for your job
- The chances you want to change careers
- Your desire to move somewhere else
- Are you able to go from a two to one income household?
- Future earning ability
- Current interest rates
- Tax incentives
- Individual tax bracket
- Chances family outgrows house
- Handyman skills
- New appliances you will have to buy
- Quality of school districts
- Local property taxes
- Status of current debt (student loans, car payments)
- Risk tolerance
- Ability to save money
- Have you started saving for your kids college?
- A lot more, but you get the idea
My point is simply this: there is no right or wrong answer. There is no “rule of thumb” when it comes to buying vs. renting.
Why I bought a house at 24
The #1 reason that I chose to buy a house so young was because I wanted to own a house.
I didn’t buy a house because of the $8, 000 tax credit or for the mortgage tax deduction. Nor did I buy a house because I was tired of paying rent.
The decision came down to my personal preference of owning rather then renting my home.
Do it the right way
By no means did I rush out and buy a house in a rush the day I decided that I wanted to become a homeowner.
I was patient. I researched local markets extensively. I worked on improving my credit score. I saved enough to avoid paying PMI for longer than two years.
My then fiancee and I (eventually) found a house that we both loved and could afford. We moved in right after our wedding.
To buy or to rent?
If you are contemplating buying a home, great. However, if you’re making this decision because you think it will increase your net worth now or in the future, not so great. There are far better places to invest than in real estate.
The decision to buy a home isn’t going to improve your financial life. However, it does have the potential to improve the overall quality of your life.
It has mine.
16 Responses to “Why I Bought A House at the Age of 24”
I’m 22. I’m purchasing.
4 bed room, 2 bath, finished attic, new wood floors. Some TLC is needed, but overall amazing buy for 65.9k…that’s right, 65K!
Costs me nothing too, did I mention that? City location. Near the Uni and businesses. I’ll be renting my 3 rooms and attic out, and live in the 4th room, to get a positive 1200-1600$ a month GROSS. Minus PITI of around $600….Still +600-1000 monthly, then save profits till something breaks. Nothing out of my pocket. Cash cushion from my job JUST in case.
No college education either. All elbow grease.
Not to mention, I just pulled my own arse out of 90% maxed CC’s…3 of them!
EDIT: my bad. I meant 4 rooms and 1 finished attic. 2 car garage, backyard space and house is 3 floors. 2100 sq ft I think.
I rent and have always rented because i live in a the high cost NYC metropolitan area. My perspective to the the buy vs rent argument boils down to a simple argument. I rent a place for less than what I can buy. I don’t equate the two. If I was to buy a place that cost $4000 to rent, then I wouldn’t rent it. I would simply find a place that rents for $2000 and make the best of it and save my cash.
Same as leasing a car. If the card I could afford $500 month I would simply lease a car for $250 and save the difference.
I like to live below my means, it helps me sleep well at night.
Also the NYC area is unlike many other real estate mkts in the country. You would be hard pressed to buy a decent property under $350k. Add on maintenance and taxes and that is a large amount of money regardless of where you live.
I’m 20, and I bought my first house last summer, I was 19. I had 30 thousand saved from selling all kinds of stuff for 2 years, on ebay, etsy, amazon and craigslist, and from working at Pizza Hut for 9 weeks once, too. I looked online at cheap houses all over the East coast, I found one I liked in a really old town, and I bought it! 26k! My mom moved with me, so I’m not living alone, and neither is she, but it is so much different than me living “with” my mom, I own this place! My expenses are even lower than I anticipated- I charge my mom rent of 350 a month and that covers almost EVERYTHING! Way cool! I’m kind of lazing around this past winter, but I recently got back on track with the online sales, and I hope to have 50k together in 2 years. I’ll rent this place out (market rate is 800 right now)and buy something else cheap. By the time I’m 30 I hope to own a few houses outright, and be renting them all out, except the one I live in, and the one I save for my mom.
I have not seen a better time to buy a house except maybe the mid 60â€™s. Rates are low and so are prices.
This discussion (post + comments) is interesting for me because I will be 40 at the end of this year and haven’t even thought seriously to buying a house yet. I’ve been a renter since age 23.
Why? Not having much money, much is never staying in one area too long, wanting to live in insanely high real estate markets (Boston or NYC area)–and a good part of it is just avoiding the hassle of shopping for a house!
Lots of good stuff in there, especially:
“…Buying a home is an investment, part of the returns from which is the opportunity to live in the home rent-free. Unlike returns from other investments, the return on homeownershipâ€”what economists call â€œimputed rentâ€â€”may be excluded from taxable income. In contrast, landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is effectively both landlord and renter, but the tax code treats homeowners the same as renters while ignoring their simultaneous role as their own landlords…”
“Do you think you could rent a $250,000 house for only $1,000 a month?”
No, I never said I could. I was merely pointing out an example of opportunity cost that folks should consider before automatically assuming that home purchasing is the right option for them. With money tied up in equity, as in this example, you are basically paying $1,000 per month rent plus amortized taxes, maintenance and insurance.
As an aside, my estimate for maintenance, taxes, and insurance on my house is about $750/month. So the question would be how much residence could you rent for $1750 less renters insurance.
It may make sense to spend the $250k or it might not. It all boils down to mindset and goals.
My house is paid for, but I never think that I’m living rent free. It’s like I invested the $250k and the returns from it are paying part of my “rent” with the remainder of the “rent”, (maintenance, taxes, insurance), coming from the proceeds of other investments or from income.
#3 Robert said: “…So if you have a $250,000 house and you could get a guaranteed income of 5% if the money was invested instead, then the opportunity cost is around $1,000 per month….”
Do you think you could rent a $250,000 house for only $1,000 a month?
Opportunity cost would essentially recommend that as long as you have access to a low-interest mortgage and high-returns on investments, you should have as little equity in your house as possible. Renting could be compared to maintaining 0 equity in your house and paying someone else to assume the maintenance and risks associated with home ownership.
I took the rental route for several years and did well with it. Between the condition of the market and the tax credit, last year was a perfect time for me to gain lots of potential equity for less input cost, and a really nice place to live to boot. I would not have lived in my old rental house if I had a family. My new place should be good for a family of 5 easily enough.
#3 Robert) I said: “rent free”, not “free” — nice strawman.
Of course I have costs. All my cars are paid for, yet they still have costs (maintenance, gas, registration) — but I bet you my paid for cars are costing me much less than someone who is ‘renting’ theirs through a leasing agreement.
#4 RJ) there is no ‘opportunity cost’ (for me), since rental rates are already higher than my combined mortgage/insurance/taxes/maintenance costs.
In a nutshell, renters are already paying quite a bit more for the same house (monthly) than I am — and I still have a mortgage. It is only going to get better once my mortgage is paid off.
If I wanted, I could rent my house out, and collect enough in rent to cover all the expenses with the property (mortage/taxes/insurance/maintenance) and still have a positive income of around $200. So if anyone is missing an opportunity cost, it is renters in my area. Might not be the same situation in your neck of the woods.
Anyhow: everyone should perform their own calculations. Not everyone is cut out to be a homeowner!
My wife and I bought our first house at 28/29 years old. We bought because the market was good, the interest rates were low, and ultimately, we wanted to get down to business when it came to getting settled in a place of our own. We were tired of renting. We wanted a place we could put holes in the wall, hang up whatever we wanted wherever we wanted, and a garden out back.
Financially, we’re in good shape, and furthermore, we’re home owners. We feel like part of the community, not renters in a large apartment complex who are just getting by.
My fiance and I just bought a duplex and I am 25 and he is 28. Renting a place in buffalo is $500 plus utilities which run about $200/month. We bought this place and send $481/month for the mortgage (including insurance and property taxes) plus an additional $200/month for repairs. We have a renter that pays $500/month so basically we pay $200/month plus the utilities and we have an extra room we rent out to students during the semester. Overall we now spend $200/month period vs about $700. It was definitely financially good for us.
@BG – Congrats on planning to pre-paying your 15 year mortgage. That’s not easy to do.
Interested to know, when doing your calculations did you invest the difference saved between renting and buying for the 15 years?
@John – A lot matters on where you live. Sounds you like you did things the right way. You went in with a plan to pay off your mortgage and plan on staying there a long time. Good luck!
@BG – I wish folks would be more careful when making this argument because it gives false information to those who might be better off renting their whole lives.
Even *if* the house is completely paid off, you don’t live there “free”. There are the maintenance costs, (the roof will need replacing eventually), there is the insurance cost, and there is the property tax cost. In addition to all those, there is the opportunity cost.
Opportunity cost in this case is the amount of income possible from investing the equity of the house. So if you have a $250,000 house and you could get a guaranteed income of 5% if the money was invested instead, then the opportunity cost is around $1,000 per month.
Bought my first one at 24 too. I had enough of the ‘rental’ life from college. I agree with the comment about not looking at a house as an investment or a piggy bank. Houses are shelter! However:
I choose to buy because of my plan to rapidly pay off the mortgage (extra payments on a 15-year fixed). Once the mortgage is paid off, that is when the financial benefits of home ownership kick in, and surpass rental costs.
Run your own numbers, and calculate how much it would cost to rent the rest of your life, versus making house payments for 15-years, and living rent free for the next 40.
A good friend of mine bought land, built a house, and had it all paid off in 5 years — was 30 when he did that…
My girlfriend and I are polar opposite examples of this question.
I bought a house in October, 2009 just a few weeks after my 29th birthday. I qualified for the tax credit and upon receiving my refund a week ago, I immediately paid down the balance to 80% L/V and cut out PMI. My interest, tax, and insurance are now less than what I was paying in rent for a smaller house that was ~50 years older than my current home. If you take into account the energy savings from the ground-source heat pump I can include 2%/year maintenance costs in that figure. Not to mention I love my house, and garage, and 2 acres 😀 If I pay minimums from now on I’ll own the house free and clear on my 42nd birthday. I have absolutely 0 regret for buying this home.
My girlfriend bought a house in 2006 when she was 24 years old, then spent more to update and remodel the house to improve it’s value. Sadly with the market the way it is it’s worth much less than she paid for it despite the input costs. She is underwater on the mortgage, and the renovations were mostly financed on credit cards because she didn’t have enough equity to get a HEL. Even if she gets above water, she is still in a pretty thick fog.
In 2006 she and I were in similar shape financially. She would have been a little better off than me. I rented and waited while she bought then.