I have this impression that it’s seen as a riskier decision to buy a home, knowing you won’t live in it long enough to pay off the mortgage and then sell it when you’re ready to move away, when compared to renting a home. Am I off base on that, and if so, why is this the case?
In: Economics
Just risky. You have alot of money tied up in the house. Things could go wrong, repairs, damages, market could change.
Because the first couple years you are paying off mostly interest so you aren’t getting much equity. Equity is how much of your property you own if you sell.
Add in when you sell, now you need to pay lawyer/closing fees and most likely commissions,and penalties for ending your mortgage early.
Now if you sell and don’t own any equity or the place didnt appreciate in value over the couple years, all that money comes out of your pocket.
There are significant fees associated with buying and selling a house. A few years may not spread them out thin enough to make it a good deal.
Much of it boils down to fees. Realtor, lawyer, land transfer tax, etc. If you stay long enough you’re effectively amortizing those transaction fees down to reasonable amounts but if you’re jumping every few years, that’s many thousands blown every time.
It depends on the area, but depending on how soon you sell the house, there may be additional taxes/penalties.
Now, if you’re doing this as a conscious financial decision. you can counter for it with planning to remain there long enough (this will vary by location) and choosing areas where it would be likely not that difficult to sell the property. For example, where I am the property values never drop, only slow in growth when the market gets bad and homes often sell before their listings go live. This would be a lower risk location compared to a place where it could be on the market for months and possibly sell at a loss.
1) You can always try to plan expenses, but a lot of homes will come with some kind of unexpected, expensive problem to fix within the first 1-3 years. Things that drastically reduce selling value or cause other problems that will, if you don’t fork up the cash/credit to fix it yourself. HVAC, Hot Water, Sewage/Septic, Roof, Foundation, Flooring, Electrical, Plumbing, Kitchen updates, Outdoor Landscaping, New Local Laws/Public Policies, etc)
2) One of the unique advantages of homeownership as an investment is that this is one of the only reasons a lending institution would be willing to loan you so much capital over so much time. There is virtually no other type of loan you can get that will give you so much buying power for such favorable terms like a <10% APR. By selling early, you negate much of the long term advantages of this type of investment. Most of your early payments will be going towards interest, not principal. You will not have much equity when you want to sell, you’ll figuratively be like a shareholder, not a true owner, with how little you’ve actually paid off. The house will not have adequate time to appreciate, and in such short time there’s really not as strong of a guarantee it will not depreciate. Imagine buying a house in 2006. Economy’s booming one moment, a few quarters later and your house has actually *lost* value. Now you’re a bagholder, anxiously awaiting *years* for another boom to see your investment be profitable again.
Short term, it’s usually just not worth it. People often don’t get mortgages unless they are reasonably certain they are okay with owning the property for the foreseeable future, 5-7+ years. Typically, by that point they have paid a significant portion of their loan *and* the house has appreciated a decent 15%+.
Here’s an easy audio explanation since I’m sure five year olds can’t read well. It’s very well done and gives a great explanation
https://www.nytimes.com/2023/12/01/podcasts/the-daily/should-you-rent-or-buy-the-new-math.html
You can generally expect to spend about 10% of the cost of the house in fees and taxes to sell it, maybe 3% to buy it, and interest is front loaded.
If you’re gonna be in a $100k house for 3 years, that’s $3k up front, probably $6k/year in mortgage interest, $4k/year in property taxes, and $10k to sell it when all is said and done. So let’s add that up – it’s about $45k, which is $1200/month. If you could rent that house for $1200/no and put any leftover money into a savings account, you come out ahead of someone who bought it and sold it. That’s your best case if you don’t need to do any repairs on it
Home ownership “builds equity” when you’re holding a house long enough that
1. It goes up in value significantly due to appreciation / inflation
2. You got in at a low interest rate
3. You kept it long enough to be in the middle-later part of the mortgage when proportionally less goes to interest and more goes to principle
4. You kept it long enough that the various buying/selling fees (“closing costs”) are more spread out
The realtor’s fee in most parts if the US is 5-6% of the sale price. Add another 1% for all the other fees. So if you were to buy a house and turn around and sell it for the same price the next day, congratulations you just lost tens of thousands of dollars and your realtor’s kid gets a nice car for Christmas.
Generally you want to hang onto a house until that 6-7% up-front cost is insignificant compared to the amount you’d have paid while renting. Other factors, like your mortgage interest rate, property taxes, and home value change matter too.
But generally speaking, buying a house for a year is a bad idea, you’re just giving the realtor a pile of money you could have spent on rent. Buying one for a few years starts to make sense, and buying for a decade or more is a win. But you don’t have to plan on owning it for the full 30 years.
I bought a place about 9 months ago but there’s a very real possibility that my wife and I will move to a different state in the next 3-5 years.
Whilst some of my money is paying off the mortgage, about half to 2/3 is going to interest on the mortgage but the interest is still lower than the equivalent of rent so I’m ‘saving’ money each month by having a mortgage compared to paying rent.
However, there were significant costs (stamp duty) when buying the place. I worked out that it’s going to take 2 years before the money that I ‘save’ each month because my mortgage interest is fewer than paying rent pays off the cost of buying a place. Not to mention having to pay real estate fees when I sell the place.
It’s possible that stamp duty and selling costs will wipe out any increase in wealth that I’ll have from only owning the place a couple of years compared to renting.
However, there are benefits. I don’t need to hassle a landlord to get stuff done, I can do it. There’s security, I don’t need to worry that my rent will go up 20% next year. Etc.
Latest Answers