Rent vs Buy in 55901>Question Details

Victoria Los…, Home Owner in Rochester, MN

buying vs renting? I can afford to buy, but will likely not stay in the area >3 yrs

Asked by Victoria Lossen, Rochester, MN Wed Mar 7, 2012

I have a dog, so I need a fenced yard, which automatically excludes condo's and appartments. I feel like the monthly rent of ~$1000 that most are asking would be better spent towards equity. But I have a feeling it's not that simple. Please advise.

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Hi Victoria, the answer to that question is quite complex. First it makes a difference on where you want to buy. Rochester MN for example has had a very good real estate market this year and the unemployment rate is just over 4%. Prices have started to increase. So much depends on the national economy and consumers belief of what the economy is doing. Rochester also has a very good rental market. If the market was not right to sell in 3 years, if you bought the right property, it could be rented until the market was right.
0 votes Thank Flag Link Sun Dec 30, 2012
You would still need to do the same thing with a rental situation by figuring out cap rate, cash flow, and whether you will have positive or negative leverage if you were forced to rent in order to make sure it is a sound investment.

If you overpay for a house, and then in 3 years the rental rate can only cover half of your mortgage it could put you at even more of a risk. The majority of retail buyers don't know how to do a rental correctly, and I would say you are better off renting for the next 3 years than putting yourself at risk like that.

You also lose most of your foreclosure rights in Minnesota when the home is not your primary residence anymore.

It would not hurt to get in contact with a Realtor down In Rochester that knows the market better than we do up in the cities.
0 votes Thank Flag Link Fri Mar 16, 2012
Oh, now I get it!!! :D

Yeah, that's not a bad idea if you can afford it. Just know that, if you want to buy another property after that one, the rental income you'd be getting from renting out that property in Rochester would not be taken in to account toward your income for a year.

And, I would check out the market for renters in Rochester. Of course, it would only be a snapshot in time for what's happening right now, but at least it will be helpful to try and prognosticate about what will be going on a few years from now.

Good luck!!!
0 votes Thank Flag Link Thu Mar 15, 2012
sorry for the confusion Susan, I don't own a property currently. I'm asking about whether it's feasible to buy a house when I move to Rochester in June 2012, live in it 3 yrs (maybe 4 or 5) and then rent it out until it is profitable to sell?
0 votes Thank Flag Link Thu Mar 15, 2012
So, Victoria527, do you have another house to sell? That info isn't in this question.

But, anyway, many sellers are playing the waiting game before selling. It's not a bad idea. You can get some income from your rental property to pay your rent for the place you'll be in less than 3 years.

Forgive me if I misread your response here. It sounds like you're asking about selling a property you already have, whereas your original question was about renting vs. buying. Am I reading this right?
0 votes Thank Flag Link Thu Mar 15, 2012
What about the option of renting out for another 5-7yrs before trying to sell the house? That's starting to seem like an option as I am looking for a place to rent which would run me about $1500 for what I need (>0.3 acre lawn, people amendable to dogs). And it seems like I'm coming across people who are leaving Rochester after their training for another job, etc. that are just looking for someone to pay their mortgage as tenants. Is this a more winning option?
0 votes Thank Flag Link Thu Mar 15, 2012
Hi, Victoria!!

Well, it would seem that we, as agents, would be telling you it's a better idea to buy. And, there are some that really believe that, I guess.

After 18 years in the biz, my answer would be that you're better off renting if you know for SURE you won't be here longer than 3 years. The costs of a mortgage and the amount you'd pay toward principal would not make sense in 36 months. Not to mention that fact that we cannot, in all good conscience, tell you that you'd experience ANY appreciation of the property in 3 years time. I mean, if someone bought in 2009 and tried to sell now, chances are they'd be taking a hit on the price they paid. I don't want to EVER put anyone in that position. So, I feel very much like I should err on the side of conservatism and say that real estate is ALWAYS a long term investment. It is rare that a short term real estate purchase is going to yield high returns.

Good luck, Victoria!
0 votes Thank Flag Link Mon Mar 12, 2012
I would say BUYING is the best route....Maybe.

There is a general route and then there is a specific scenario that I feel is the best way to buy for your timeline.

#1 you need to compare Rent versus Home-buying in Rochester. Mortgage, PMI(FHA usually), insurance, taxes, utilities, insurance, etc...BASICALLY you have to figure out the whole cost of Home-Ownership. On top of that you have to count maintenance which you don't ever have to worry about renting.

#2 Because we are in a flat market, and depreciating still in some areas (even Rochester I don't know), you can not count on equity appreciation over the next 3 years. So, you just need to focus on costs of ownership versus Renting.

#3 You are paying almost all interest on the mortgage the first 3 years so the balance of your loan will not decrease much either.

#4 You then have to think about what it costs to SELL right now. If for example you say 4% estimate closing costs, 3% seller paids (normal right now), 6% commission to Realtors, You have 13% of your "equity" as just a transaction cost! Boy people always seem to forget how expensive it is to sell a house...

#5 So you are correct that it is not that simple, and in most cases renting will win math wise versus buying in general terms.

Where I think this changes is if you think like an investor and buy like an investor. In other words buy into enough equity to cover the transaction cost of selling and then a lot more. For most buyers who just do FHA this is not possible, because the "best deals" are the really ugly houses that investors buy and ones that will not qualify for FHA.

The FHA203k is a great program out there that allows buyers to buy homes at investor prices, and then the repairs on the property get wrapped into one loan. This is one seamless process that is actually not that scary if you have the right people on your team.

I don't know if you can qualify for DP assistance, because most have a timeline on how long you must live in a property. However depending on the rules this sweetens the pot even further. The state has usually $4500 towards down payment assistance, and then most cities/counties do too. I had one buyer close on a house and he only paid $1,000 to get in yippie!

I work with investors so I know this to be true, and I am doing this with one of my clients right now. After I deduct the 13% it will cost for my client to sell his home; he is still "buying into equity" of between $30,000-$40,000. He qualifies for DP assistance(he does not plan on moving in 3 years but still wants to be protected). This will save him about another $9,000 dollars. We are buying at a good price point (which is low), so even after the rehab costs get wrapped into the loan his monthly payment is comparable to rental rates in the cities. This way all those costs I mentioned above do not eat up his equity. At least that is the way I look at it since the guy has to live somewhere and would be paying rent anyways.

Most Realtors only understand one way of doing real estate, and if they don't actually work with investors who buy and flip properties they don't even know what a good deal looks like. I also notice a lot of buyers agents not telling their clients when they qualify for DP assistance out of pure ignorance. Seems stupid for me if you are a Realtor who "specializes" in working with buyers to not know this. I notice it at the closing table all the time unfortunately. FHA203k scares a lot of people, and quite honestly you need to find the right lender too because these are becoming scarce in the lending realm.

But for my client we are building up enough of a protection net, where even if he sells 3-5years down the road he is protected from further market depreciation. He gets to enjoy all the benefits of home-ownership, and he is out of renting and can still have a peace of mind that he is in a stable asset. Oh and his Dog is happy too!!

For buyers that are unsure if they will be in a home more than 5 years I believe this is the best route to ensure you are protected. Whether that is something that actually fits your goals is a whole other matter. Some buyers only want move-in ready homes. Others would rather just rent, which essentially is risk free and never the wrong choice in my mind.

But if you are sick of renting, want to live in a house, and ensure your asset is protected in case you move soon then I think the FHA 203k is the best option.

I have never met a buyer that DIDN'T WANT A GOOD DEAL, but if all you do is go FHA, which is like 50% of the market right now, and on top you can't even buy the best deals because of the guidelines, then you are kidding yourself.

Not saying the others below me are wrong, because believe me renting is the safest bet in this market.

Hopefully I have simply presented a scenario today where BUYING can actually still work, even in our current market.

0 votes Thank Flag Link Wed Mar 7, 2012
Hi Victoria527,
If you know you won't be there more than 3 years, you should rent. Save your money for a downpayment. Wait another 3 years to buy, prices are declining. Good Luck
0 votes Thank Flag Link Wed Mar 7, 2012
Hi Victoria,

Of all the questions we get at our office daily this is a simple one. Considering purchasing and selling costs, if you are not sure you are going to be there for at least four years, you are probably better off renting.
0 votes Thank Flag Link Wed Mar 7, 2012
My suspicion is different - that you will be better off renting, if you will only be there for such a short time. Reasons:
1) Your closing costs are high when spread over only 3 years.
2) Add to that a commission for selling and "amortize" that for 3 years
3) Then add in real estate taxes and added insurance costs.
4) Add in your monthly mortgage payments
5) And we haven't even considered maintenance costs and the hassles that may be associated with selling.
6) I don't foresee any significant appreciation in that time span, which could offset these costs. It may be different in your area and maybe I will stand corrected.

If these expenses are the $1000 rent you anticipate paying, then the answer is simple.
0 votes Thank Flag Link Wed Mar 7, 2012
Personally, if you are able to buy vs renting, I would encourage you to buy. Three years is a long time to pay for someone else's house. And, with your pet, you would have more flexibility to behave the way you want to. Call me if you wish to see any homes in your price range.

Holly Sires
Property Brokers of MN
0 votes Thank Flag Link Wed Mar 7, 2012
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