We are a young couple who are renting apartment near NYC. It has been almost 4 years that we have been renting and after every couple of years we had to move to a newer location and every time our rent has been increased by nearly 20% and now we are looking at near about $ 2600 to 2800 rent without including utilities. At this juncture I am thinking of buying an apartment instead of renting. I would be a first time buyer and because I am still a legal immigrant in this country I am not sure of me staying more than couple of years in this country. I am trying to understand what would be better in my scenario , renting an apartment for 2600 $ or buying a house for $ 400,000 with 20 % downpayment and selling it after two years for 400K. I have a very good credit score which is above of 780. I would like to understand, if I would make any loss if I sell the house after two years. In case of renting I will eventually loose $ 62K in two years and this is the primary reason that I am considering buying as I will be the owner of the house and can stay as long as I want.
When you sell a house around between 7-10% of the sales price will go to various fees. Mostly to the agents, but also to county fees, city fees, deed tax, and possibly covering closing costs for the buyers. So if you sell a $400k house for the same price you buy, just in fees, you're out $40k.
Mortgages are structured so that the frontend is very interest heavy, while at the end you're mostly paying towards principal. So for the first two years you will pay down very little of the principal. Figure around $2500 for the mortgage, and without running the numbers I bet you would pay an average for the first two years of around $1800/month in interest. $43,200. Mortgage interest is tax deductible, so you'll get some of that back.
That's also $16,800 in equity you'll have on the house, so you'll get that back out when you sell.
Rough numbers, I would be you lose around $50k buying the house and selling for the same price two years later. That doesn't take into account having to do any maintenance. And it assumes you can sell quickly when you want to.
Renting is not throwing away money. You don't lose any money. You get a place to live in exchange. You don't build equity, sure, but you don't need to worry about maintenance and other related issues. When you're looking to be somewhere short term renting is generally the best idea.
Some pros and cons to renting vs buying:
Some advantages of buying:
When you rent, the money you pay is gone. When you buy, assuming you don't have the cash to buy outright but get a mortgage, some of the payment goes to interest, but you are building equity. Ultimately you pay off the mortgage and you can then live rent-free.
When you buy, you can alter your home to your liking. You can paint in the colors you like, put in the carpet or flooring you like, heck, tear down walls and alter the floor plan (subject to building codes and safety consideration, of course). If you rent, you are usually sharply limited in what alterations you can make.
In the U.S., mortgage interest is tax deductible. Rent is not. Property taxes are deductible from your federal income tax. So if you have, say, $1000 mortgage vs $1000 rent, the mortgage is actually cheaper.
Advantages of renting:
- You can move somewhere else whenever you like or almost whenever you like. You may have some obligation on a lease, but worst case is usually that you have to pay a year's rent. When you buy, if you move you can't just stop making mortgage payments. You have to sell the place. Sometimes this is easy, but often it can take a long time to find a buyer, and/or you cannot sell the house for what you paid for it.
- When you rent, your rent includes maintenance. If the plumbing leaks or the furnace fails, you call the landlord and he has to fix it. When you buy, it's your problem and you have to fix it or pay someone to fix it. Many first-time buyers fail to take the cost of maintenance into account. Also, for an apartment the landlord typically takes care of mowing the loan, clearing snow from the parking area, etc. When you buy a house, this is all your problem.
There are a lot of transaction costs involved in buying a house. You have to pay a realtor's commission, various legal fees, usually "loan origination fees" to the bank, etc. Plus the way mortgages are designed, your total payment is the same throughout the life of the loan. But for the first payment you owe interest on the total balance of the loan, while the last payment you only owe interest on a small amount. So early payments are mostly interest.
This leads to the conventional advice that you should not buy unless you plan to live in the house for some reasonably long period of time, exact amount varying with whose giving the advice, but I think 3 to 5 years is common.
One mitigating factor: Bear in mind that if you buy a house, and then after 2 years sell it, and you discover that the sale price minus purchase price minus closing costs ends up a net minus, say, $20,000, it's not entirely fair to say "zounds! I lost $20,000 by buying". If you had not bought this house, presumably you would have been renting. So the fair comparison is, mortgage payments plus losses on the resale compared to likely rental payments for the same period.
You may be in a situation where buying is preferred, especially because you can enter the market in a strong position - with a 20% down payment. If you have the financial ability to assume the risk of owning, you may be better off.
I would consider two things.
Renting is purchasing a service. You are buying the flexibility to move with minimum hassle and the landlord is assuming the risk of owning the asset (property). They will make money on you, like any service provider.
Buying is purchasing an asset. You are buying the underlying asset and assume all the risks associated with it. This is large, unforeseen maintenance, fees, taxes, depreciation, etc... Some of these risks were passed to you as a renter, but some were not.
Just like purchasing $400k in stock, if you have to sell when the market is down, you lose big. You win if you can hold.
Unlike a stock, real estate will eat your cash in taxes and repairs unless it is rented. If you are willing to be a long-distance landlord, this may work out. Understand that property management fees will eat into your rent income and being long-distance will give more potential for a bad tenant to ruin your property value. These and other factors (e.g. vacancy rate) will increase your risk of loss and should be considered.
Some of this will be your preference, since you will spend much more time dealing with buying/selling/property management as opposed to a more clean rental situation. Is this hassle worth the savings? For many, yes; others, no.
Finally, I hope this calculator can help clarify some of the financial aspects for you.
I actually didn't do the math with your numbers, but I recall Sal from Khan Academy did a nice video about your question, challenging the notion that it is always better to buy.