Real Estate Q&A — May 4, 2014
Our daughter’s family is moving here after school is out, with their two kids, and we have had several discussions on whether they should rent or buy a home. It is likely this is not the final stop for their family, but they will be here for at least 2-3 years. Typically they move every few years as one contract expires and he secures another. We have encouraged them to rent as we feel the local real estate market is still unsettled, but they are leaning towards purchasing a home and then selling when his contract expires. What would you suggest, rent or buy? Thanks for your help.
—Robert, Grand Junction
I say, “buy, buy, buy!!” Just kidding, but figured since I was a real estate agent I should always say, “buy”, right? Let me start by saying that there is no right or wrong answer and it all lies in what makes the most sense to them and what level of risk are they comfortable with. There are many things to consider, but all of the typical things to consider may be outweighed by the time line of 2-3 years and then having to sell and move. In today’s world buying and selling in less than 3-5 years has to be looked at carefully and three questions, must be answered, which one is the best financial decision? What can I rent or buy in my desired location? and what level of risk am I comfortable with?
Hopefully they have a house hunting trip planned early in the summer so they can get a lay of the land and figure out what areas of town would best suit their family. After they figure out where they want to be and what kind of house they need, they can look at their options of what is typically available in their price range for sale and figure out how hard it will be to find a rental home that they find desirable.
From a purchase perspective, you must consider the costs of not only buying now and selling in 2-3 years, but the costs of home ownership over the 2-3 years. When you own your own home there are costs associated with home ownership that you often may not recoup when you go to sell, like general home maintenance, replacement of mechanical systems should something fail etc.. The costs of buying and selling are not inexpensive. Making an assumption of a purchase value of $250,000, when they purchase and assuming they are not purchasing with cash, they will have closing costs of roughly 2.5 percent ($6250) of the purchase price. If they live in the home for 3 years, they will have a principal loan reduction of 4 percent or $10,000, but will also be able to write off the interest paid on their loan which will equate to about $6,000 - $7000 in tax savings over the 3 years depending on their tax bracket. Remember that one of the main financial benefits of home ownership is the ability to write off the interest you pay and in the first 3 years the majority of their monthly payment is interest.
When they go to sell in 3 years a good rule of thumb to use is 7 percent in selling costs. Lets say their $250,000 home has appreciated 3 percent each year for 3 years then you have an approximate value of $273,175. If you subtract 7 percent ($19,122) then you have an after sale value of $254,000, which is $4,000 over what they paid for the home. As we discuss buying, there is one big assumption here, and that is that prices are going to increase over the next 3 years. I personally believe they will, but by how much is up in the air.
As for renting, it does not provide the upside of appreciation, or tax write off, but it does provide the freedom to move without any strings attached and the comfort of knowing if anything goes wrong with the home they will not be financially responsible. There is a comfort level with renting that is just the right thing for people who will not be in the home for a long period of time and this may be the difference maker.
The bottom line, what is their risk tolerance? Understanding that there is some risk in buying and selling and virtually no risk in renting, but also no potential upside, what makes the most sense for their family. I, personally, would purchase, but also see a good case for renting. I hope this helps clarify a decision that certainly has many angles.
The Kimbrough Team
REMAX 4000 Inc.