Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I've lived under the impression that it is never wise to buy a house (as your home) unless you are planning to live there "at least five years" (or something like that). But is this necessarily always true?

I currently live in an area in which the local rental market for houses (that is, renting a house to live in) does not have many offerings at all at any given time, and yet it has a large number of houses for sale, many of which are low-priced relative to the range across the U.S. Yet my work future has some uncertainties and I can't know how long I will live in this area.

So, the question: In terms of the personal finances aspects, are there ways in which it would be sensible to buy a house as one's home just for, say, one year (or so), or is that essentially always a losing proposition relative to renting?

share|improve this question

4 Answers 4

To answer your question, you need to ask yourself

  • How much are the transaction costs to buy and, later, sell a house?
  • Can I recover, in a single year, these transaction costs and still make a worth profit?

Common transaction costs can be really hard to compensate in a single year. It can include house inspections, closing costs, agents commissions, etc---all together, it can be up to 6-10% of the value of your house. This is a difficult goal to beat in a year, and your margin for miscalculations and market fluctuations is very low. In brief, you can be screwed big time.

To make a profit in a year, you need to reduce transaction costs to the minimum: Avoid agents, inspectors, mortgage brokers, etc, which can pay you back with an interesting surprise. Bottom line, it can make sense to buy a house for a year, only if you can reduce all the related transaction costs by doing them yourself.

If there are many houses in the market for sale, I would try to convince someone to lease the house for a year in the best terms possible (and maybe even try to sub-lease some of the rooms), or also rent-to-own the house. That way you avoid the transaction costs upfront, and would make more financial sense for a non real estate guru.

share|improve this answer
    
Thanks. In regards to your second point: what about not worrying about making a profit, as much as only losing about as much as one would lose if one paid rent for a year. –  Chelonian Feb 18 '13 at 2:08
2  
@Chelonian At the end of the day, your house is just an investment option which you would like to compare against other ways to allocate your savings (in this case, your downpayment), so, you should take your "lost paid rent for a year", which is your investment's income, and subtract operating expenses (property taxes, HOA, maintenance, etc), debt service (capital an interest payments), and any other expenses. If you take all this into account, you will have a better idea if it is better to invest your money--as a downpayment--in a house, or search for other ways to receive a better return. –  Peretz Feb 18 '13 at 3:31

If there are a lot of houses for sale, can you be sure that in a year or two you can sell yours? How long does the average house in that area stay on the market before it is sold? What percentage of houses never get sold?

If it can't be sold due to the crowded market you will be forced to rent the house. The question for you then is how much rental income can you get? Compare the rental income to your monthly cost of owning, and managing the house.

One benefit to buying a house in a market that is easy to rent a house would be if you are forced to move quickly, then you aren't stuck being 3 months into a 12 month lease.

Keep in mind that markets can change rather dramatically in just a few years. Housing costs were flat for much of the 90's, then rocketed up in the first half of the last decade, and after a big drop, they are one a slow climb back up. But the actual path they are on depends on the part of the US you are in.

The rule of thumb in the past was based on the fact that over a few years the price would rise enough overcome the closing costs on the two transactions. Unfortunately the slow growth in the 90's meant that many had to bring checks to closing because the equity gained wasn't enough to overcome the closing costs due to low down payment loans.

The fast growth period meant that people got into exotic loans to maximize the potential income when prices were going up 10-20% a year. When prices dropped some found that they bought houses they couldn't afford, but couldn't sell to break even on the transaction. They were stuck and had to default on the mortgage.

In fact I have never seen a time frame when the rule of thumb ever applied.

share|improve this answer
    
+1 for that last sentence! –  Dilip Sarwate Feb 19 '13 at 14:42

There are two main factors at play to consider.

  1. Real estate markets can be volatile in the short term so there is greater risk when buying a house you know you need to get out of quickly.
  2. If you finance the house, the closing costs are a bit higher proportional to the total time you are financing the house. It may tip the scale towards rental if you are comparing true cost over the 5 years of living in the house.

Also, realize that no advice is universal. You need to evaluate your exact situation and do what is best for you.

share|improve this answer

When on this topic, you'll often hear general rules of thumb. And, similar to the 'only buy stocks if you plan to hold more than X years' there are going to be periods where if you buy at a bottom right before the market turns up, you might be ahead just months after you buy. I'd say that if you buy right, below market, you're ahead the day you close.

Edit - I maintain, and have Schiller providing supporting data) that real estate goes up with inflation in the long term, no more, no less. If the rise were perfectly smooth, correlated 100% month to month, you'd find it would take X years to break even to the costs of buying, commission and closing costs. If we call that cost about 8%, and inflation averages 3, it points to a 3 year holding period to break even. But, since real estate rises and falls in the short term, there are periods longer than 4 years where real estate lags, and very short periods where it rises faster than the costs involved.

The buy vs rent is a layer right on top of this. If you happen upon a time when the rental market is tight, you may buy, see the house decline 10% in value, and when the math is done, actually be ahead of the guy that rented.

share|improve this answer
    
That's a good point, but as I wrote to Peretz, I am not even thinking of this as an investment to "win" but in comparison to renting and losing comparably to renting. In other words, if I lose $10,000 in closing costs + house depreciation + other fees in a year and I would have spent $9,000 in rent, I'm only a $1,000 worse off with the house and that might be worth it for me to have a better year of living than in the worse-quality apartment. –  Chelonian Feb 18 '13 at 18:03
    
@Chelonian you are forgetting about the interest for the year. Many people find that the monthly payment for the mortgage(principal, interest, taxes and insurance) is not much different from the monthly rental cost. The losses we have been discussing are in addition to the monthly cost. If you lost 10K due to " closing costs + house depreciation + other fees" that would be in addition to the cost of the mortgage payment. –  mhoran_psprep Feb 18 '13 at 20:12
    
@mhoran_psprep I would be very likely to buy the house in cash, so mortgage payments/interest wouldn't be a factor. Should I update my question to mention that? –  Chelonian Feb 18 '13 at 22:51
    
The other issue is the risk you are taking on that if your job situation changes, you, like the others in the area that you've mentioned, will also have a house that may be difficult to sell, given that there are many other houses already on the market that have not sold. Are you willing to potentially bear the ongoing costs of maintaining a second house if you were to have to move for work? If not, you may be able to rent on a short-term basis from a seller whose property has been on the market for a long time. –  JAGAnalyst Apr 10 '13 at 19:45

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.