Why is it riskier to buy a home and sell it after a few years rather than renting? #homebuying #renting #risk #financialplanning
Have you ever wondered why it’s considered a riskier decision to buy a home, only to sell it after a short period of time, instead of renting? Let’s dive into the reasons behind this common perception and see if it holds true.
Reasons why buying and selling a home quickly can be risky:
- Property value fluctuations
- Mortgage and transaction costs
- Market conditions
- Rental income potential
Are you making the right choice for your situation?
By understanding these factors, you can assess whether buying a home for a short period of time is truly the best financial move for you. So, what will you choose – to buy or to rent? #financialplanning #realestate #ROI
Just risky. You have alot of money tied up in the house. Things could go wrong, repairs, damages, market could change.
There are significant fees associated with buying and selling a house. A few years may not spread them out thin enough to make it a good deal.
Mortgage + Property taxes are usually higher than rent. Property values are not guaranteed to increase. Most of your payments early on are going towards interest rather than principle. There are also costs associated with buying and selling and with taking out a mortgage initially.
Much of it boils down to fees. Realtor, lawyer, land transfer tax, etc. If you stay long enough you’re effectively amortizing those transaction fees down to reasonable amounts but if you’re jumping every few years, that’s many thousands blown every time.
It depends on the area, but depending on how soon you sell the house, there may be additional taxes/penalties.
Now, if you’re doing this as a conscious financial decision. you can counter for it with planning to remain there long enough (this will vary by location) and choosing areas where it would be likely not that difficult to sell the property. For example, where I am the property values never drop, only slow in growth when the market gets bad and homes often sell before their listings go live. This would be a lower risk location compared to a place where it could be on the market for months and possibly sell at a loss.
There are many pros and cons to both. It really depends on your situation.
I could advocate for both depending on your situation.
Things like equity, rates, capital, market trends, risk, financial situation, age, all factor into that decision.
I wouldn’t go jumping into renting blind. It’s not a golden ticket, and you’re not guaranteed to make money, but it can be a great investment and a strong part of your portfolio.
1) You can always try to plan expenses, but a lot of homes will come with some kind of unexpected, expensive problem to fix within the first 1-3 years. Things that drastically reduce selling value or cause other problems that will, if you don’t fork up the cash/credit to fix it yourself. HVAC, Hot Water, Sewage/Septic, Roof, Foundation, Flooring, Electrical, Plumbing, Kitchen updates, Outdoor Landscaping, New Local Laws/Public Policies, etc)
2) One of the unique advantages of homeownership as an investment is that this is one of the only reasons a lending institution would be willing to loan you so much capital over so much time. There is virtually no other type of loan you can get that will give you so much buying power for such favorable terms like a <10% APR. By selling early, you negate much of the long term advantages of this type of investment. Most of your early payments will be going towards interest, not principal. You will not have much equity when you want to sell, you’ll figuratively be like a shareholder, not a true owner, with how little you’ve actually paid off. The house will not have adequate time to appreciate, and in such short time there’s really not as strong of a guarantee it will not depreciate. Imagine buying a house in 2006. Economy’s booming one moment, a few quarters later and your house has actually *lost* value. Now you’re a bagholder, anxiously awaiting *years* for another boom to see your investment be profitable again.
Short term, it’s usually just not worth it. People often don’t get mortgages unless they are reasonably certain they are okay with owning the property for the foreseeable future, 5-7+ years. Typically, by that point they have paid a significant portion of their loan *and* the house has appreciated a decent 15%+.
The first few years of your mortgage almost the entirety of your mortgage payment is just paying off the interest that your mortgage is accumulating. You’re essentially just paying more expensive rent to the bank instead of a landlord, except you’re also now responsible for paying for repairs, maintenance/upkeep, fees, taxes, etc on top of it. Let’s also not forget the fees and work involved for just the act of purchasing and then selling the home, not as big of a deal if that cost is spread out over 25 years but can be a big hassle if it’s only for 3 years.
Many later age retirees are choosing to sell their homes and switch to renting as in many cases it is not only lower maintenance but cheaper for them as they are on a fixed income.
When you buy a house, there are normally 2 realtors involved. Each one usually gets 6% of the total sales price.
The first few years in a home, you are paying mostly only interest.
A mortgage charges you for mortgage insurance, unless you put down around 20% of the home value in cash during purchase.
There are fees for the mortgage, for an inspection on each house you consider making an offer on (like if the offer falls through due to timing or items discovered in the inspection which the seller won’t remedy), there are fees for the paperwork in transferring ownership of a property. Homeowner insurance costs a lot more than renter insurance. If any repairs need done… you pay for and do them. You have to pay property taxes.
Also, if you ever want to move, a rental can be sublet, or negotiated for early release. A house needs sold, or a property manager arranged.
So…. If you have enough cash to put down 20% of the purchase price, things are a LITTLE better. But assuming you don’t have that, you lose about as much money each month to interest and insurance as you would paying rent. Meanwhile, you lost 12-20% of the home value to fees during purchase and/or sale.
If you did not own the home long enough for the property to gain 20% value through property price increases… you lost a load of money.
You can generally expect to spend about 10% of the cost of the house in fees and taxes to sell it, maybe 3% to buy it, and interest is front loaded.
If you’re gonna be in a $100k house for 3 years, that’s $3k up front, probably $6k/year in mortgage interest, $4k/year in property taxes, and $10k to sell it when all is said and done. So let’s add that up – it’s about $45k, which is $1200/month. If you could rent that house for $1200/no and put any leftover money into a savings account, you come out ahead of someone who bought it and sold it. That’s your best case if you don’t need to do any repairs on it
Home ownership “builds equity” when you’re holding a house long enough that
1. It goes up in value significantly due to appreciation / inflation
2. You got in at a low interest rate
3. You kept it long enough to be in the middle-later part of the mortgage when proportionally less goes to interest and more goes to principle
4. You kept it long enough that the various buying/selling fees (“closing costs”) are more spread out
Here’s an easy audio explanation since I’m sure five year olds can’t read well. It’s very well done and gives a great explanation
https://www.nytimes.com/2023/12/01/podcasts/the-daily/should-you-rent-or-buy-the-new-math.html
The realtor’s fee in most parts if the US is 5-6% of the sale price. Add another 1% for all the other fees. So if you were to buy a house and turn around and sell it for the same price the next day, congratulations you just lost tens of thousands of dollars and your realtor’s kid gets a nice car for Christmas.
Generally you want to hang onto a house until that 6-7% up-front cost is insignificant compared to the amount you’d have paid while renting. Other factors, like your mortgage interest rate, property taxes, and home value change matter too.
But generally speaking, buying a house for a year is a bad idea, you’re just giving the realtor a pile of money you could have spent on rent. Buying one for a few years starts to make sense, and buying for a decade or more is a win. But you don’t have to plan on owning it for the full 30 years.
Rent money is dead money.
Every single mortgage payment will improve your life .
My parents bought a home in the 70’s , their siblings did not and rented .
My parents now have the option to sell their home and pay for excellent aged care for their rest of their days or leaving their children a huge inheritance , my aunts and uncles are slowly going broke with the rent and food increases and have nothing to show for 50 years of renting.
Also , rent is always more than a mortgage as the landlord needs to charge more than they are paying in mortgage payments.
Lastly, the secret to paying a mortgage is capital payments, a capital payment comes off the total of the loan, so you set your payments as low as you can, save as much as you can, and every 3 months or so make a capital payment so the total is reduced (reducing the amount of interest you pay). Banks are onto this btw and call it a “redraw” facility, tempting you to redraw it (your capital payments) so they get their interest back up
This happened to me three times in a row: I got a job and then bought a house and then lost my job in 2 years and sold my house for a $50,000 profit.
It is the greatest thing ever. But… I was lucky to be living in Portland where the real estate prices were booming. If the real estate market was busting, I might have lost money.
So… it’s a great idea but there a variables that might leave you in trouble.
I bought a place about 9 months ago but there’s a very real possibility that my wife and I will move to a different state in the next 3-5 years.
Whilst some of my money is paying off the mortgage, about half to 2/3 is going to interest on the mortgage but the interest is still lower than the equivalent of rent so I’m ‘saving’ money each month by having a mortgage compared to paying rent.
However, there were significant costs (stamp duty) when buying the place. I worked out that it’s going to take 2 years before the money that I ‘save’ each month because my mortgage interest is fewer than paying rent pays off the cost of buying a place. Not to mention having to pay real estate fees when I sell the place.
It’s possible that stamp duty and selling costs will wipe out any increase in wealth that I’ll have from only owning the place a couple of years compared to renting.
However, there are benefits. I don’t need to hassle a landlord to get stuff done, I can do it. There’s security, I don’t need to worry that my rent will go up 20% next year. Etc.
I was always told that selling your home after less than 5 years was a bad idea but it depends. I bought my Seattle condo in 2012 for $105k. I sold it 7 years later in 2019 for $225k. Had I held onto it for 3 more years I could have gotten $275k. In my case, I was living paycheck to paycheck and had crushing amount of credit card debt. Selling that condo and moving on was the best financial decision of my life, no regrets, would do again. If you’re wondering, the total amount of fees and closing costs came out to roughly $18k. The closing costs are one big reason to avoid selling your home too early as it’s pretty expensive.
It depends on what the market is like. For the US…
The rates and appreciation from 2010+ were such that if you bought during that time you probably made money.
Simply owning from 2016-2020 was enough to double your money in some markets, while your loan balance and interest rate are both fixed.
The question for the present is, are we in a flat spot or at the top of the chart before a crash.
I would say that’s not accurate. There is nothing wrong buying a home, and using that to buy your next one.
The fees involved with selling a home aren’t THAT extravagant in the grand scheme of things. In most cases, property appreciates over time, so in a few years you’ve probably made a conservative 10-30k in equity alone. You might also sell at a good time and make a bit extra.
The point is, if you sell quite soon and the property hasn’t appreciated much, you might break even with a sale, or technically make a loss. But if you’re happy with that, then it’s not right to say it’s “risky” because you’re making an informed decision to sell for a profit or loss.
If you’re just renting (with no other property owned) that money is being thrown away effectively, you’ll never get it back, whereas at least if it’s your own property being sold, you ideally will make it back (or again, break even).
House prices mostly go up, but sometimes go down. If you buy and prices go down you could lose a large amount of money by selling. Over 20 years you are virtually guaranteed a steady increase. Over 1 or 2 years there is a risk of a big loss. (And fees, as mentioned in other comments)
I live in Southern California, appreciation is 15-20% a year, most homes out here have 100-150K of equity after a couple years, not a bad idea to own if you have the means to do so.
Borrowing a million dollars for 30 years will have you repay about 2-3 million to the bank (interest).
The bulk of what you pay in the first half of the 30 year term is the interest.
Then in the second half of those 30
years you pay out the principal, eg the money you actually owe.
If you check with the bank how much you still owe five years after making mortgage repayments, the figure you’ll get will be almost the same as the amount you borrowed. Those five years of paying out your loan won’t have shrunk it.
People today: buying a home is a really bad idea, I’m better off investing in something else.
Also people today: it’s impossible to afford a home with these prices going up all the time.
Apart from fees eating up the gains, which really just comes down to a cost comparison with renting.
As with any investment you don’t know what the short term price development will be. This is why you are discouraged from putting money stocks or bonds if you know you are going to need it soon. Because the market might take a dip.
Same with housing. In the long term its pretty safe to assume that you will see returns from owning a home. In the short term, nobody knows for sure.
(Nobody knows for the long term either, it’s just an expression)