Back a few weeks ago, I aroused your eyeballs (and probably other senses) with the tale of how me and a certain lady are planning on renting a place.
It was an easy decision. Our new place is brand new, costing us $1550 per month (including all utilities), while the equivalent house would have set us back pretty close to $300,000. Then we would have had utilities on top of that, as well as taxes, house insurance, interest, and maintenance/upkeep on top of the purchase price. So we decided to rent, a decision we’re pretty happy with.
(One exception: we live on a moderately busy road. This is fine, except for one thing. When I’m sitting on my balcony, people walking by feel the need to say hello to me. No, random stranger, I’m not interested in a conversation.)
One of the comments in the original post asked an interesting question. At what point would we be looking to buy a place? What would have to happen before I’d plunk down my
hard-earned barely-earned cash on a property? I thought that might be a fun thought exercise, so let’s go through it.
Obviously, the price of houses would have to come down for me to consider buying one. For that to happen, I’m going to assume mortgage rates will have crept up.
Here’s what I’m going to assume:
Purchase price: $200,000
Mortgage rate: 4%
Total loan: $190,000
Annual tax expense: $1,800
Annual insurance cost: $800
Annual repairs and maintenance: $2,000
Annual utilities: $5,000
In that situation, my mortgage will set me back $1,031 per month, or $12,372 for the year. Add on my other costs, and I’m looking at $21,972 for my housing expenses. That’s definitely more than what I’m paying now, which works out to $18,600. But we’re getting closer.
Let’s assume the same exercise, but on a house that costs $150,000 per year. The mortgage comes to $9,120 annually. We’ll be extra conservative and assume everything else costs the same, which would set me back an additional $9,600 per year, for a total of $18,720. That’s slightly more than owning, but screw it. Close enough.
Remember, I’m living in a brand new two bedroom apartment that’s more than 1,000 square feet. It has all sorts of upgrades like nine foot ceilings, built-in blinds, new appliances (including a dishwasher, aka the marriage saver), a nice balcony, and so on. Meanwhile, here’s what $159,000 gets you in my town.
- A 738 square foot house built in 1938
- A relatively big yard
- One refrigerator (other appliances aren’t included for some reason)
- An “older” garage, which is really Realtor code for “shitty”
- A functional kitchen, but one that could probably use upgrading
- A decent living room, with what looks to be relatively new flooring
Which would you rather live in?
I might never own
Now, of course, there are some variables in the renting side that probably need to be considered. My rent is unlikely to stay at $1,550 forever, because of inflation and all that jazz. And I’m not factoring in any appreciation on a house, which would likely be something, at least over a few decades of ownership.
I’m also looking for a house that’s between 800 and 1,000 square feet, in relatively good shape, with a useable basement, and with a yard that doesn’t suck. That should be worth more than my apartment because I’m getting more living space and a yard.
Therefore, I’m setting a target price of what I’m looking to buy between $180,000 and $200,000. It’s not terribly scientific, but these kinds of decisions never are. I’m also basing it on a 4% interest rate, which is just a guess at this point.
Currently, the type of house we’d like to buy is a little north of $250,000. Which means I’m looking at a price decline of between 20-25% before I’m going to even entertain the thought of buying a place.
Will that kind of decline happen? Damned if I know. Those of you who have been around for a while know I’m pretty bearish on Canadian housing, but still. 25% is a big drop. Even if it does happen, I don’t think it’ll happen overnight. It’ll likely take years.
I’m quite okay with this. I can continue to invest my capital in things that generate me income without worrying about tying up a bunch of cash on something that isn’t productive. Hell, maybe I’ll buy another rental property or two, mostly because the irony of being a renting landlord amuses the hell out of me.
The point continues to be this. I can understand the appeal behind wanting to own your own place. But remember, owning property that doesn’t pay you each year to own it is consuming, just in a different way. As long as you see it that way, knock yourself out. Just don’t fool yourself into thinking it’s an investment.