Buy or rent? Here’s a datapoint

Last Updated on February 27, 2019 by Dave Farquhar

I once looked at a house that spoke loudly to the question of whether to buy or rent. The asking price is about $100,000. It last sold in the late 1980s for $79,000.

Selling for $100K now isn’t a profit. That is why I couldn’t get a house I don’t want out of my head.

Adjusting for inflation, it ought to be a $144,000 house if it was a $79K house in the late ’80s. The county thinks it’s a $130K house. It went on the market for that last summer, and still hasn’t sold in spite of several price cuts. It needs a new roof, and if the roof is end of life, there’s a chance it needs a furnace, air conditioner, and/or hot water heater as well. I would expect to have to sink $12K into it for a new roof and new floors, at the very least, to turn it into a good rental.

The other problem with the house is that it’s a one-bathroom house. That may or may not be fixable, and that almost certainly limits the market for it. Any potential buyer today will want a second bathroom, some way, somehow, and most people buying a house want it to be ready on move-in day, not a series of projects. For all the talk I hear of investors swooping in and buying all the good fixer-uppers… I just don’t see it. I see the fixer-uppers sitting until the price drops into the range that an investor is willing to pay. Then they pounce, but only then.

Back to this house. I think what happened was that they bought a flawed house fairly cheap in the 1980s and lived there, and didn’t make much effort to do any major maintenance on it. Now the major maintenance is due.

Doing the math, the depreciation on the house cost $152 a month, more or less. Mortgage interest, taxes, and insurance probably cost another $400 per month, based on my experience. Interest rates were much, much higher back then than they are now, but I’m sure they refinanced at least once to get that rate down. Closing costs on a couple of re-fis would add another $20 per month to the total.

So, essentially, they lived in a 3-bedroom house in a nice area for $572 per month. Factor in the mortgage deduction, and the real monthly cost is probably under $500 per month.

Even without factoring in taxes, that cost is in the range of what a one-bedroom apartment goes for in the same zip code. A recently renovated one probably can fetch $600 or so, while an aging one might go for closer to $500.

But this is no one-bedroom apartment. It’s a three-bedroom house with a two-car garage on a nearly half-acre lot. There’s no comparison.

The other thing to remember is that this is something of a worst-case scenario. The economy was good in 1989, and the housing market was doing fine. In 2013 when I looked at the house, the housing market was still trying to recover. So the sellers are in a classic case of buying high and selling low. And a more conventional 3-bedroom, 2-bathroom house in this area would stand a chance of selling for the assessed value of $130K, as long as the seller was willing to replace the roof. That’s still a discount over the 1989 value, but a manageable one. It works out to less than $100 a month, even after factoring in the cost of replacing the roof. That’s close to the cost of taxes and insurance over the years.

So I don’t put too much stock in people who say it will never make sense to buy a house again. That’s overly pessimistic, just like expecting the value of real estate to never drop–a common thought a decade ago–was overly optimistic. In the long run, buying a house is cheaper than renting, even if the value of the house doesn’t keep up with inflation.

Then again, if you don’t plan to stay in the house for five years, it definitely makes more sense to rent. It takes five years to recover the closing costs, let alone realtor commissions and any repairs you might have to make. If you don’t know what you want, or if you expect your career to force you to move in the short term, it makes more sense to rent until your life stabilizes a bit.

Now, all that said, this house is a lesson in what happens when you put off maintenance. Using up a house until it has nothing left to offer you is an option, I suppose. But when it comes time to sell, one way or another you’ll pay for that maintenance. It may mean selling at a discount, or getting the work done before closing, and the house will stay on the market longer, and you may end up having to sell to one of those We Buy Houses for Cash people.

I would rather do the maintenance in a controlled manner, spaced out over the time I spend in the house. That way, I get a chance to enjoy the improvements myself, rather than buying all of those improvements for someone else at the end. Had this particular house been maintained over the years, it probably still wouldn’t have kept pace with inflation. But the county thinks the house is worth $130K, and they have it priced at $100K, and there are no takers.

Had they spent an average of $1,000 a year making improvements on an as-needed basis, I think the house would have held its value better, and by holding depreciation at bay, the monthly cost of living there would be even lower.

And if you’re interested, here’s an analysis of buying from a slightly different angle.