Selling To Renting Opinions

14 years ago

I would like some insight/thoughts on the following scenario.

I have a friend who owns their home (has a mortgage). They bought when prices were high and their payments are a lot for them, but they are making it. The neighborhood they live in is established and is one of the best in our area (many historic homes, a great park, good school). The home is smaller and needs some renovations, but it has a huge yard and her husband can do all the work himself. They are making it every month, but things are tight. They recently had a third child which wasn't in their original plans.

She told me they thinking of selling their house and renting. She claims they want out of the area (feels crime is on the rise, and things in outlying areas are not so great) and have their eyes on an area about 40 minutes away. She says they think they will sell the house (They will make possibly 15,000 when they walk away...when I say make I mean they will pocket. They have put a lot more into the house than that)and pay off all their debt and move into a rental for a few years and save for something else.

I have told her to really think this through because I have always been told owning is better than renting. I feel they are making a big mistake and will regret it. I am posting here, because she has repeatedly asked for my advice, but I want to make sure my feelings aren't getting in the way too much. Here are some other things I think of in this situation...

1. All of their friends (and many family members) live within five miles of current home. They have three young children.

2. She is a flight attendant and is out of town at least two-three days a week.

3. Her husband works construction and has long hours (when he is working)

4. They do not know much about the area they are thinking of moving to other than it looks cute.

I can see that getting out of debt and not struggling each month would be enticing. However, they are not desitute. They live okay. I could also see them doing this if in a few years the potential for their income to go way up was there. However, they won't be seeing any major income spikes. She will get increases, but his income is not likely to go way up. I fear that with the way things are going in a few years they may have hard time getting into something else...they will essentially be looking at a house similar to what they have now. I think her thought is that in a few years they are going to be able to buy in a nicer, newer neighborhood and reality is (at least in my eyes) that doesn't seem realistic. What things could I share with my friend that I might not be seeing? I would love for her to stay in her current home because I see it having so much potential and being in a great neighborhood. I think my biggest concern is they are being unrealistic about where they think they should end up. I also feel like she has no idea what renting will be like with three children. Along with that, I fear they won't save and in three years they will not have money to put down on a house. Again, I would just like some insight so when she asks me again I can share all viewpoints with her. Thanks!

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Comments (12)

larke
14 years ago
last modified: 9 years ago
Well, it's interesting, because no one can predict how well they'll do when selling, whether they'll get $15,000. or sit on the market forever - things are still pretty volatile out there. But on the other hand they might be more relaxed not to have the place taking every cent. Have they considered refinancing? I agree that the long term view re purchasing again might not be too realistic, but maybe they'd get something less ambitious than what they have now, and be happier about it (sounds like they might have overreached to begin with... what else is new!). Renting-to-save though does seem like a bit of a dream because it is so hard to discipline yourself to save 'for the future' and watching the money go to a landlord is frustrating too. Have they considering renting out a room (after making sure it meets legal standards for renting)? A bit of a concern is that they had a third child unplanned - of course it can happen to anyone, but these days only teenagers should be that careless, and I wonder what it says about their level of all-round maturity considering their tight finances.
Billl
14 years ago
last modified: 9 years ago
"I have always been told owning is better than renting."

Then you have been lied to. Financially, it completely depends on the relative price of owning vs renting. It is perfectly reasonable to rent a place and put the savings aside each month for a future goal. Unless you know the actual numbers, you are in no position to make a recommendation.

Besides, this is not just a financial decision. A man who works long hours, has 3 little kids at home, and a wife who travels - he may not went to spend the rest of his time on a fixer-upper and yardwork. When the wife is home, I'm sure she wants to actually see her kids and not get sucked into an endless home renovation. They also probably want to live in a neighborhood they feel safe in NOW, not one that might improve in 5 years.
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Q
Comments (125)
I think most people in this thread are emphasizing that even though we own, from a purely financial perspective, typically owning is not the best financial decision. We realize that about ourselves and acknowledge we own homes for different reasons such as pride of ownership, not having to deal with landlords, etc. Housing doesn't decrease in value like, say, cars do. But housing typically gains value, on average, at a small rate, much smaller than investing in the stock market. The weird thing to wrap your head around is that, from an economic perspective, even a slight gain feels like a loss if you know you could be making a bigger gain somewhere else. The nest egg I have sitting in my house wants to get bigger. And from the egg's perspective, it knows it could be doubling a lot faster if I had it put somewhere else besides my house. That pain my nest egg feels by missing an opportunity to make even more of itself is called an opportunity cost. So even though my nest egg isn't getting smaller while it's sitting around in my house, it knows it could be getting a lot bigger if I had it somewhere else. The difference in returns between investing a chunk of money in a house and investing it in the stock market is so great that for most people, it more than makes the difference compared to the monthly out of pocket cost of renting. And actually the bigger the nest egg you had at the beginning (down payment) the more sense it would make to rent, because you'd be able to put more money to work for you sooner, covering even more of the rental costs. It takes a special person to be so financially prudent that they choose the wise financial decision over the emotional decision even when it comes to something so fundamental as where you live. Those people do exist, and they'll be retiring early and thumbing their noses at me from their suite balcony on their cruise ship as I keep whittling away at my job until I'm 70. This financially prudent person might not own a car and doesn't eat out a lot. Wine is right out for the most part. They lift weights at home instead of the gym. Their cell phone might still have push buttons. Their low cost lifestyle doesn't need a giant nest-egg to support it when they retire, so they're able to retire earlier. But the trade-off for being tighter than a gnat's butt is that they have increased freedom and financial independence and they accumulate wealth much quicker. They're the ant instead of the grasshopper. The person Pal described is a grasshopper. And sad to say, I'm probably closer to a grasshopper than an ant. But my father in law is a super ant so I get the best of both worlds. Governments have typically encouraged home ownership through social policy. However there is little overall evidence that high rates of home ownership are a social good. Indeed 2008 showed us that there are many people who wanted to own homes that likely should have been renters. For a good overview of the pros and cons of encouraging home ownership through public policy: http://www.economist.com/debate/days/view/882 To note, many very successful countries have very low rates of home ownership. In fact Switzerland and Germany have the lowest rates of ownership in the OECD, while Lithuania and Romania have the highest. Singapore has the third highest at 90% home ownership but they also have a unique view of government involvement in the housing market. 80% of the population lives in publicly built and funded housing.
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Comments (11)
I just want to put my 2 cents in that I've had good experiences renting as well, and we were across the country every time. Our MD townhouse, which was a huge stretch for us to purchase as we were moving out and renting on the west coast, and then sat empty for 6 months, has had the same wonderful tenant for over 12 years, a gov't engineer. We rented out the CA house from MD (sold that one) and another MD house from CA (just sold that one), both to military officers, one a colleague (mistake and I knew it going in, but worked out fine, and then sold it to them) and one through militarybyowner.com. Really, we've had very few issues, smart tenants with known income, 1 year minimum leases but usually lasted a tour length. I forgot, we had another CA mountain house that we rented to civilians, also managed long distance, no problems, sold. We've made $$$ selling all of them, reinvesting into the next house (or sailboat, which has remarkably held its value), even though we certainly didn't sell at the top or bottom of the market. Good luck and timing. One thing - around here in FL, it seems like most of the buyers want the "steal", not the "deal". The sellers are all groaning because someone desperate goes for the "steal" offer and the comps drop for everyone else. Sailboat-depth waterfront can be had for under $500K right now!
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Sell or rent?
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Comments (25)
Here comes another argument... First, there are some very good reasons to own rental property as an investment but they may not be the things you are thinking. Some of the reasons that come to mind are (this is not an exhaustive list, others will have different advice and experiences, this one is mine): Rental property takes advantage of leverage better than most other investments. You can finance 80% of a rental investment which you can't do with a stock market investment. With $20,000 you can get a $100,000 capital assets with a 3% interest rate right now, that is really pretty good. Rental property lets you get a second job working for yourself. Rental property makes money the same way a job does, it lets you convert your time, effort and know-how into revenue. It is important to remember that rental property is a second job, and just like any job some people are naturally good at it, others are naturally bad at it, and just like other jobs experience matters. When you start you are going to make mistakes, as you learn you will make less mistakes, be sure that you are financially capable of absorbing those mistakes. It is an incredibly valuable experience. I believe (my opinion here) that people who are responsible rental property owners develop better spending and investing habits as a whole. I personally think it is hard not to, and prize it as one of my most valuable life lessons. However, there are some things that are also bad about it. Rental property is a job. It requires a lot more attention than traditional investing. It is not a good choice on a shoestring budget. A poor rental property owner is soon to be a very poor ex rental property owner. Houses require upkeep, houses you own and don't live in require more upkeep, houses you own and someone else lives in require even more upkeep...Upkeep is expensive. Bad houses can make great rentals, and great houses can make bad rentals. Renting is about attracting the right tenant for your price point. A lovely inexpensive home can easily turn into a not so lovely cheap home. The best tenants are typically people who can or soon will be able to afford homes but aren't buying for some reason. For less expensive rental homes they are pretty hard to find. Finally, some of the things you are saying really make me think that it isn't for you. It is not an amazing retirement investment. Assuming you have $20,000 equity in the home, taking that same $20k at your age and investing in a broad market mutual fund has averaged about $320,000 at age 67. Rental property can become an amazing retirement investment when you do smart things with the income. In and of itself, property is a rather lousy investment (here comes the argument). To clarify this, buying property in hopes that the appreciation will be an amazing investment hasn't worked very many places (there are times it has in California but that is the exception). Edit: A great thought experiment for you: First, think of the position you will be in if you buy another house without selling this one. Next, think of the position you will be in if you sold this house and bought another one. Now, if you didn't own any house at all which option would you pick? This is a way to remove the sunk cost fallacy from your decision making.
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Comments (41)
Interesting to see this thread again! I read over the responses and see this was when we had lost our first renters. We had an absolutely wonderful family after that - BEST RENTERS EVER - and no problems whatsoever. It probably is in part due to the fact they had owned a home for several years and were looking to move to a specific area and having a very hard time finding a home. Our rental house was close to a direct path to the husband's workplace. I think because of them owning a home, they were very mindful of our they treated our house. My dad enjoy seeing them out and about. They moved out end of November. We are planning to sell the house soon. We have a little touch-up painting and a couple of rooms that will need to be repainted (they home-schooled in one room). This past year we put in a new heat/air system. Rental money is in an account and has not been used as income. It's not a huge profit at this point, but it has been a help on our taxes! Here's hoping to a nice profit when we sell!!
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homersgarden
Original Author
14 years ago
last modified: 9 years ago
Bill I see your point. The house they live in now is fine and doesn't need any renovations...they want renovations. You couldn't find a more safe neighborhood than the one they currently live in so I think what I am seeing is their expectations may be too high or they are financially worse off than what she is telling me. I usually don't offer advice, but in this case she continually asks what I think they should do.
terezosa / terriks
14 years ago
last modified: 9 years ago
What would be the difference between the rent payment and their mortgage payment. If it is minimal, then staying put would probably be a good idea. If there is a big difference between rent and mortgage, then selling and renting may be a good idea.
Billl
14 years ago
last modified: 9 years ago
"She claims they want out of the area (feels crime is on the rise, and things in outlying areas are not so great)"

Doesn't sound like she feels the same about the safety of the neighborhood as you do.
larke
14 years ago
last modified: 9 years ago
Just a little reminder about people here... there are certain people who, no matter what the issue, no matter when, will always ask for advice, constantly wanting your opinion, etc. However, if you're patient enough, you'll see that it's a habit, and goes on all the time about everything, and in the end, they never seem to take anyone's advice, but go off and do their own thing anyhow. Don't get sucked in - or at least take it all with a grain of salt. It's flattering to be asked a lot, but also disappointing when the advice is ignored and guess what - they're grown-ups too, and will make their own decisions in the end (or should get help already!).
brickeyee
14 years ago
last modified: 9 years ago
Owning is not always a better deal than renting, especially in the short term.

In the long term rents tend to increase while fixed rate mortgages stay the same (payment may change for taxes and insurance, but principal and interest are fixed).

No one rents houses for less than the carrying cost, though on a house rented for many years the mortgage payment may be many years old.

I often just break even the first few years of ownership in a rental house (before depreciation), but as rents slowly increase my fixed mortgage means the house starts having a positive cash flow, and when the mortgage is aid off becomes very positive.

They need to investigate the costs of renting very carefully and then compare it and ownership after taxes.

Renters who think they are not paying property taxes, mortgages, etc. are only fooling themselves.

It is built into the rent.

Even the cost of my insurance policy on the rental gets rolled in. It is less than a full up policy since it does not cover contents, but the renter should still be covering their possessions anyway.
My policy will pay me for repairing the house.
The renter's policy will pay them for the contents.
worthy
14 years ago
last modified: 9 years ago
We recently bought a resale home. A month later, a bargain rental came up. The investment income I typically earn from the amount now tied up in a downpayment would have paid the rent, insurance and utilities on the rental home. But, of course, I wouldn't have had the pleasure of upgrading and maintaining a 50-year old home with an out-of-date floorplan while dragging a gaggle of kvetchers with me a daunting 15 minutes away.

IOW, it depends.

How to keep friends: don't give them any advice, even when they say that's what they want.
calliope
14 years ago
last modified: 9 years ago
There are some people who really shouldn't own for various reasons. If she is gone a large part of the time, and he works long hours and they have kids with all the bites that takes out of time.....they could even be perfect for condo living. No 'unknown' expenses looming in the distance. No yard maintenance. No renovations. No commitments, other than a lease. They may have feelings off deflation for sinking money into an investment, only to see it turn upside down. They may really be craving for money in the bank and no debts. There may be a lot of things they aren't telling you, only just enough to get you to 'affirm' their already made up minds. Maybe they don't want to live near their relatives. Maybe they just need a change.

It isn't always dollars and cents.
brickeyee
14 years ago
last modified: 9 years ago
"...they could even be perfect for condo living. No 'unknown' expenses looming in the distance."

Except those annoying 'special assessments' when anything major needs to be done.

Even if the reserves are their, they need to rebuild them after a major expense.
calliope
14 years ago
last modified: 9 years ago
You can get slapped with special assessments on any property if you think of it. But, you do have a point.
calliope
14 years ago
last modified: 9 years ago
I mentioned lease. I didn't say buy a condo unit, lease one. The assessments aren't the renter's problem. Short term anyway.

Selling To Renting Opinions

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