Should You Rent Or Buy?

downloadMy husband and I bought our first house when we were 25. “How smart we are!” We thought. “How cleaver and good with money we are!” We’d basically made it, right? Here we were: young, with our own house. We had basically succeeded at life and were most likely going to be millionaires. Our parents praised us. Our friends were in awe. Life was good.

Our first house had made us feel so successful, why not buy a second? So, we did. Instead of selling our first house, we bought a second house and rented out our first. Unfortunately, we bought this second house in 2007 (right before that giant housing crash that happened). “Oh well,” we thought. “We are still ridiculously cleaver. As long as we don’t sell until the market recovers, we’ll be fine.” Again, our parents and friends were impressed. Now, we not only owned our own home, but we were landlords! Winning at life again!

The market crashed, and being ever on the lookout for a good deal on real estate, we bought three homes between the years of 2008 – 2011. Now, there was no denying it (not that we were): we were the most clever people on the planet. We were going to be rich any day. As soon as the market recovered, we’d sell and bring in bank!

Fast forward to the recovery of the market. We sold one property at a profit of 55k! Woo Hoo! Our plan was working. We just put two of our other properties on the market for a substantial profit – patting ourselves on the back and doing the happy dance.

UNTIL…..

Until I sat down with the numbers and calculated exactly how much we stood to make. After all the repairs, maintenance, taxes, dues, fees etc… our actual profit was really small…and it got even smaller once I calculated capital gains tax. But, hey, we were still going to make a profit so that’s good, right?

I then calculated how much we would have made had we invested that money in the market rather than in real estate and I was floored.

Assumptions about this comparison:

  • The money I’m comparing is the down payment, taxes, dues, insurance and repairs. NOT the mortgage or interest since I figured that money would be spent regardless on having a roof over our head.
  • Being extremely conservative, I took an extra 10K a year off of our “investment” money to account for having to pay a higher rent than just the amount we payed for our mortgage and interest.

After taxes, our Shoreline property will provide us with: $45,000

Had we invested that money instead, we would have: $114,000

OUCH.

After taxes, our Pinehurst property will provide us with: $80,000

Had we invested that money instead, we would have: $208,000

Yes – I calculated paying taxes on the invested money as well. What I did not take into account was the following:

  • The stress involved in buying/selling a house
  • The time spent driving to the rental homes
  • The time spent managing the rental properties
  • The inconvenience of having to deal with renters and their problems (and we had great renters) at all hours.

I can hear you now: “Well, you obviously didn’t wait until the market was high enough. You must not have sold for that much higher than you bought.”

Wrong.

Each property is selling for around 90K more than we bought it. The problem is that that money gets eaten up in fees and taxes and repairs.

“Well, you must have put too much into repairs.”

Nope.

We purposely bought newer houses so that we wouldn’t have to fix them too much.

Please don’t get me wrong, there are many reasons to own your own home that have nothing to do with finances. It is for these reasons that I do NOT regret owning my own home now.

  1. You can do whatever you want to your house and garden. No one can dictate what color the walls have to be or how the garden looks (unless you live with a strict HOA in which case, I do not envy you at all).
  2. You are secure…ish. As I’ve watched the housing prices soar in Seattle, the rental prices are keeping up. I have many friends who were forced to move because their landlord raised the price of their rent by hundreds of dollars a month. I can’t imagine having to leave my neighborhood, my daughter’s school and my friends because my landlord wanted to make more rent.
  3. When something goes wrong, you fix it. This may not seam like a positive, but when I was renting, I really hated having to call and wait on my landlord to fix things that were broken. Sometimes they wouldn’t fix it, and if they did, who knows how long it would take. I much prefer to be in control of how my home works.
  4. You don’t have to worry every time you spill something or scratch the wall. When I was renting, I lived in constant fear that I wouldn’t get my security deposit back which meant that I would get really nervous every time a glass of wine spilled or a wall got dinged. Owning my own home has allowed me to chill out a bit and not stress the occasional sharpie on the wall masterpiece.

In short, if I could go back in time and do things differently, I absolutely would. I would have rented until buying the house that we currently live in. If I wasn’t that smart, I would have at least sold my houses instead of turning them into rentals. Do I regret my decisions? Not at all. I learned so much by going through this process of buying, renting and selling. More information is always better. I just wish I had thought to collect this information before buying five houses!