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Buy vs. Rent: Asking the Question in Mid-Life

One day late last autumn I awoke to find myself skidding uncomfortably close to a number that begins with a 5. Wait— how did that happen? I’m— I’m middle-aged! Heck, going by current US life expectancy figures, I’m already several miles over the hill (81 is the average for women as of 2014). Existential dismay notwithstanding, I’m in pretty good shape for a geezer. I can still race a half-marathon with ease, and don’t yet need reading glasses. Financially, I’ve done a creditable job of saving, investing, and retirement planning. There’s just one problem: I have yet to buy a home for myself.

This is not for lack of financial fortitude. The fact is I was blessed (cursed?) to be born in one of the most desirable places to live on the planet, and thus the most expensive. Real estate prices here are off the charts. Almost literally. Take a look:



Source: Paragon

As a native of the San Francisco peninsula who still lives here, I’m a pretty rare beast; an awful lot of my contemporaries have been driven out by the ridiculous housing prices. I’m determined to stay if I possibly can, but it’s a stiff challenge on a single income. I have a vision of myself in this endeavor looking something like this:

donkey As I have saved and saved for that down payment, diligently, faithfully, year after year, home prices have continued to grow faster than my savings; I can’t keep up. The tantalizing prospect of home ownership dangles eternally before me— just out of reach!

Grab the Carrot! Or not…

But why, you may ask, did I not buy during that lovely little dip in the chart above during the recent recession? Good question. I’ve been in a position to chase that blasted carrot for a number of years because I’ve been hunkered down in the old family homestead with Mom. This works really well for both of us; while I’m furiously squirreling away cash like a good donkey, Mom reaps the benefits of having someone on hand to deal with the cable guy, take her to doctor appointments, and argue with her over the merits of the Giants’ third baseman. She’s happy, I’m happy, and my siblings are all happy knowing I’m looking after Mom.

During the recession I considered making the ultimate lunge for the carrot. I thought I could buy something and rent it out until such time as I was ready to occupy. My financial advisor, however, counseled against this. “You wouldn’t be getting any utility out of your money,” he reasoned. ”You couldn’t charge enough rent to cover the mortgage. Leave that down payment working for you in the market until you’re actually ready to move.” This was an opportunity cost I had never considered before. His point was a good one. And keeping that chunk of almost-a-down-payment in the market has indeed paid off; it’s done well during the economic recovery. But as I’ve watched housing prices skyrocket again in recent months, I wonder. Did I miss my chance, standing on the sidelines, only to see the window of opportunity slam shut?

Sink (it in a house) or Swim (in a pool of liquidity)?

Saving takes time. As time has passed and the birthdays have piled up along with the cash, a question that once seemed nearly blasphemous creeps into my mind: On the sad future day when my current living arrangement ends, should I actually consider becoming a renter rather than buying? The Rent vs. Buy dilemma is an old one: Drop a chunk of change on a down payment and tie yourself to a mortgage for 30 years, or pour cash down the voracious bottomless pit of monthly rental payments indefinitely?

The “right” choice is different for everyone. When you’re young and have little cash saved, renting is the obvious choice. It’s less obvious later in life. Middle-aged folks with a substantial amount of cash to invest have to ask: Is it wiser to freeze it into a fixed asset (a house), or continue to have it work for you making money in the financial markets while you feed the rent monster?

Professor Moshe Milevsky of Toronto’s York University makes a fascinating argument in favor of buying later in life in his book, Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life: “When you are young the vast majority of your true wealth is locked up in human capital, which is illiquid, nondiversified, and definitely nontradable. It therefore makes little sense to invest yet another substantial amount of total wealth in yet another illiquid and nondiversifiable item like a house…. In sum, a strong argument can be made…that renting is the optimal choice when you are young. “However, when you are older (say 50 or 60) and you have unlocked a large portion of your illiquid and nontradable human capital and converted it into financial capital, you can afford to “freeze” some financial capital and lock into a home purchase. At that stage, not only do you have more wealth in total, but also your balance sheet (and especially your human capital) is likely not as sensitive to the state of the economy and its disruptive impact on wages. So, [the completely logical] Mr. Spock buys his first house–after 25 years of renting–at the age of 50.”

As I approach 50 myself, this is music to my donkey ears. I want to believe Professor Milevsky is right. But in an over-the-top market like the Bay Area, is there an argument to be made for renting your way through the second half of life?

Note that rents here aren’t a whole lot more palatable than home prices:



They trend rather closely with monthly house payments that include mortgage, taxes, and insurance. So how does one choose?

The Older First-Time Home Buyer: Do the Math

Younger folks are more likely to regard a first-home purchase as a stepping stone to moving up the real estate chain, while older first-time buyers may lean more toward settling down and staying put. Stability of housing costs becomes far more important than appreciation as we approach retirement (and the accompanying reduction in income). With this in mind, we’ll ignore the question of home price appreciation for this exercise. We want to focus on the overall value to be obtained by either renting or buying in the second half of life.

For the record, however, note that the Wall Street Journal recently reported that compound annual return in the three decades through 2013 on single-family homes was a mere 3.6%. In the same period, the S&P 500 returned 11.1%. NOTE: The variables in any simulation such as the following are infinite, and holes certainly may be poked here; please regard this analysis as a high-level exercise that provides some useful insights.

Buy at 50…

Let’s assume that at age 50, Jane Buyer closes on an adorable 2-bedroom, 1-bath cottage in a good location for $625,000. She’s fortunate to be able to put down a substantial 35% down payment. Now let’s crunch some numbers. 30yearWhat are Jane’s monthly costs? Taking into account tax deductions for loan interest and property taxes: monthlyfor30…for the first year, anyway. Inflation will gradually increase both property taxes and homeowner’s insurance over time. We’ll assume a 2% annual increase for both of these. Taking all of the above factors into consideration, 30 years of diligent payments will add up to a total of $926,012. Add that to her initial down payment, and 80-year-old Jane will have paid a total of $1,144,762 for her cottage. Upon paying off her mortgage, her only remaining recurring costs will be her property taxes and homeowner’s insurance, which by year 30 will total something in the neighborhood of $14,000 per year (or $1,167 per month).

…Or Become a Lifelong Renter

But what if Jane opts not to purchase, and instead commits to being a renter for life? Let’s say that she finds a 2-bedroom cottage for rent at $2,000 per month. That’s certainly less than a $2,280 house payment. But rents will continue to rise over time; if we apply an annual rent increase of 3%, by the time Jane is 60 her monthly rent will have jumped to nearly $2,700. In 30 years, inflation could potentially increase Jane Renter’s rent to $5,000 per month, and her total cost of rent over 30 years would come to $1,141,810. So $1,144,762 to buy. Or $1,141,810 to rent.

Jane Renter squeaks ahead in this scenario by a mere $2,952. Heck, that’s practically a draw, right? Not so fast. We forgot something: the down payment that Jane Renter never plowed into a home. Jane Renter would invest her down payment ($218,750) in a well-diversified portfolio of assets. Assuming a conservative 4.5% annual return, Jane could potentially realize an income of $8,000 per year on this (after taxes). Over 30 years, that would amount to a return of $240,000. (If Jane left the amount to compound for the full 30 years with no withdrawals, she’d end up with $894,683… but how much fun could she have with that in her 80s?)

Taking this investment into consideration, at age 80 Renter Jane comes out ahead by at least $242,952. Jane Buyer could potentially pull out a win in the end, but only if she lives to age 86, when Jane Renter’s advantage is finally devoured by her ever-increasing rent. But 86? Remember, the average female life expectancy in the US is 81. 30yearcumulative Maybe there’s a way to boost Jane Buyer’s chances; what if we shorten the term of her loan?

Suck It Up: The 15-Year Mortgage

Cutting the loan term in half offers several benefits: a lower interest rate, significant reduction of total interest paid, and best of all, the opportunity to hold a mortgage-burning party when Jane is 65 rather than 80. Of course there’s one major drawback: significantly larger monthly payments. Let’s say Jane Buyer was able to swing a 15-year loan at 3.36%. Her monthly costs would look like this:  15year That’s $918 more per month than the 30-year mortgage scenario, and nearly $1,200 more than rent at the start. But a 15-year mortgage saves Jane $318,159 on the purchase over the 30-year mortgage. And after the loan is paid off, Jane’s monthly expenses are drastically reduced for her retirement years. But Jane Renter will still come out ahead… at least until age 82:  15yearcumulative It’s not looking good for Jane Buyer. It gets still bleaker when, to be quite thorough, we toss in one last cost: Maintenance. Jane Buyer can count on spending at least $100,000 over 30 years to keep her little cottage adorable (and livable). That pretty well settles the question: Jane Renter wins. Hee haw.

Live Long and Prosper!

As with any financial forecasting there’s a lot of crystal-ball-gazing here, and it would be possible to manipulate these scenarios in any number of alternate ways. However, it’s hard to ignore the big lean of the numbers in favor of renting in an expensive market. The Break Even point for buying (even before considering maintenance) comes so late in life that it’s practically meaningless. What’s very clear is that time is a friend to the young. Home ownership pays the greatest dividends to those who live longest after paying off their mortgages, so mid-life buyers begin the race with a significant handicap.

The numbers may be more friendly in less expensive areas, but in pricey locales like the Bay Area they are downright hostile. So should the Donkey here untie the stick and abandon her carrot? I’m not sure. There are psychological and emotional benefits to home ownership that potentially outweigh financial considerations. But an analysis such as this certainly removes any blinders a donkey might be wearing. And donkeys can live a really long time. Join Personal Capital For Free To Better Manage Your Finances

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  1. tom w

    I am a male aged 59, never been married and no kids. 16 years ago (at age 43) I purchased a two bedroom – one bath condo unit. It was my very first home purchase. I started off with a 30-year fixed mortgage; and then in a couple of years, went to a 15-year. The place was a “fixer-upper”.

    Right now I feel like I want to sell my condo for a couple of good reasons. I need the money when I sell; and I can’t stand the place where I live at now. It was a nice place with nice people, but recently it has changed. The people are not friendly and I feel like I have nothing in common with anyone at my complex. The quality of people had changed when a lot of the owners decided to rent out.

    Also I need the money because I’m practically down to nothing. I had a few thousand $s saved up; but a recent medical procedure I had wiped it out with the medical bills. At the time I purchased my condo, I had inherited money from my deceased parents. I sunk all of the money into my condo. Over the years I was able to put money away from having a pretty good job. Plus I had a 401K plan that went “kaput!” . Just recently with my pay and expenses, I can’t put much away. And now I have all kinds of repairs and cosmetic work to do that I can’t afford.

    I want to sell and then to rent. I would like to live in a 55+ community because I’m sick and tired of having to deal with kids and immature adults at my place. Plus, my downstairs neighbors are jerks and will not be leaving soon. Some people are telling me that I will throwing my money away with renting. Maybe so, but I’ll have money from the sale. Plus, who would I leave my condo to if I were to pass away? If I stay with the condo, I’ll be struggling for a long time.

    Another option I have is to move in with my sister who is 3000 miles away. She has suggested that I should move in with her. I would be a good idea, except she’s married with two teen-aged kids and a husband who is very loud and opinionated. Plus they have dogs; and I don’t like dogs that much. She suggested that I should be with them so that I’d be safe if something happened to me. But I know that I could not stand it. My sister and her husband are in their 70s, so something could happen to them. What would happen if I moved there and something happened to them? I’d be all alone in a strange place. Her children would not take me in.

    Please help! Sorry that this is too long. Thanks.

    • Nila

      While friends can be well-intended in their advice they can also be ignorant to the facts.

      Ownership of a condo or any HOA property comes with massive risks. When you purchased the condo you signed away your US Constitutional Rights. You became business partners with all of your neighbors in a non-profit corporation. And the biggest risk is that you became the guarantor on all debts, loans, lawsuits, liabilities, settlements, construction defects, and disaster rebuilds for the entire COA/HOA/PUD/POA or whatever acronym is used for your condo association.

      Many people have done the exact same thing you did by using inheritance to purchase a condo. Some have inherited condos and the end result has been total financial devastation. As you are experiencing there is bitterness that often times happens in common interest ownership property. This quite often results in nasty and expensive lawsuits that end up bankrupting the owners with assessments they cannot pay. 72% of the HOAs in America are underfunded in their reserves. (Escaping Condo Jail by Sara Benson and Don deBat) Are you financially prepared to fork over $10,000 for your portion of a legal bill that could be created by your board members suing your neighbors for some nonsense reason? Or just because they like to bully people. It only takes one vote to put a rogue board member on the HOA board and there goes the entire neighborhood. Or would you be willing to be forced into foreclosure where the HOA takes your condo from you because you cannot pay the assessment?

      I’ve studied HOAs extensively after becoming a victim a decade ago. I’ve lost my entire retirement savings, had my health affected, and will take a $200K loss to get out of the nightmare. I would not own another HOA property if it was paid for and given as a gift!

      Condo and homeowners that are mortgage-free or have a substantial amount of equity become targets for the corruption that is ever-present in HOAs.

      Since you were asking for advice of what to do…here’s my very well-educated on this subject opinion: SELL AND RUN LIKE YOUR HAIR IS ON FIRE!!!!!!!!! You are better off renting than owning any property with common interest ownership. As a tenant you can move if you aren’t happy when the lease expires. Not to mention in many areas condos are impossible to sell.

      I would highly recommend these sources for educating yourself. The books can be found at your local library or on Amazon. Neighbors At War by Ward Lucas. (website: Escaping Condo Jail by Sara Benson and Don deBat. Privatopia and Beyond Privatopia by Evan McKenzie, HOA Warrior and HOA Warrior II by Shelly Marshall and Villa Appalling by Donie Vanitzian. And you can listen to the experts on the topic of HOAs on the podcasts of this HOA radio show;

      Best of luck. I hope you will find all the answers to every question you have about your condo ownership in the resources I have provided. I sure wish they had been available when I made my townhouse purchase. They would have been a life-saver.

      • tom w

        To Nila
        Thanks so much for the excellent reply! There was so much you said that I didn’t realize. I have a good friend who is 80 years old and he has just told me to stay with it no matter how much I can’t stand it. But yet, he can’t seem to convince me in any way why I should stay. The more I tell him that I want to leave the condo, the more that he does not want to hear about it. Although lately, he has gotten better about this. I think that he should read your reply to me; or I’ll just show it to him. Funny thing is that about a year ago or so, he told me about some people he knew that live in condos and they had a sudden outrageous assessment fee. He was very negative about that. So why should he expect me to put up with it? On top of putting up with the lousy neighbors I have – and it’s not getting better, it’s getting worse.

        At my age now and my marital status, what good would keeping the condo do me? For now, I have a Will to leave it to my sister (and her two kids) and my brother. They don’t deserve it at all! And it would be complicated for them to try to sell it because they are 3000 miles away.

        OK, I have a question now. My close neighbors tend to be noisy. I feel like I should let them know that there will be potential buyers coming to see my place. It should be a warning to them to behave while people are coming to look. The question – is there any kind of action I could take with any of my neighbors if a prospect is interested in buying; and then one of the neighbors get loud and then blow the sale?

        • Nila

          Tom W,

          I’m thankful you read my posting and found the information of value.

          If your 80 year old friend is so sold on condo ownership ask him/her what day would be good for them to sign the papers to buy it.

          This is your life, your future, your happiness, and your investment. Your gut feelings are telling you to get out. Listen to your intuition. It is giving your the right guidance.

          I will share a story with you here that is also an eye opener about condo ownership that results in inheritance. A 28 year old wife and mother of two young children inherited a condo in Florida when her grandmother passed. Shortly afterwards she received an assessment letter for $10,000 for a new roof. They wiped out their savings to pay it. Taking a closer look at the monthly cost of owning the condo; insurance, HOA fees, taxes, utilities, and maintenance, they decided it was best to rent it. After reading the CC&Rs she realized she must get permission from the HOA board to rent the unit. The board responded to her letter advising that HOA was denying her request because they were already at their maximum of 30% rentals. With that they decided to go ahead and sell grandma’s condo. It didn’t sell. Her husband lost his job. She was given my name to call for advice. Unfortunately, the only thing I could tell her was the truth. I never candy-coat my words. I had to tell her if she fails to pay the monthly dues, the HOA will charge her late fees at probably 18% interest, eventually have their attorney send her letters that will run into the thousands of dollars that she will be forced to pay, a lien will be placed on the condo, and the HOA board will foreclose and take it from her since it is mortgage-free. Before that get to that point they can also garnish her wages. With only one income in the family she cannot afford to have her wages garnished. She was crying saying they could barely buy groceries now. Sadly, grandma left her a ball and chain that until she can unload that place she is going to be suffering financially. Will the HOA board care if she is the breadwinner in her family with two small children? NO. Will the HOA board care if they garnish her wages? NO. Will the HOA board and their attorney be sad to foreclose and take her grandma’s condo from her? NO, they will be overjoyed to think they just stole a mortgage-free condo. And in many cases the HOA attorney and/or the HOA board members have been known to have their own real estate investments and they put this very property into their portfolios without and ounce of regret.

          Say nothing to your neighbors. Not a word. Stage your condo. Hire somebody to do it for you, if necessary. Rent a storage unit to store your stuff in that needs to be out of your condo for the photos and the showings. (FYI, most self storage places have discounts for the move-in…be sure to ask. And be sure to store at a place with an onsite manager living on it. You’ll pay more but it’s worth it. And secure the unit with a disc lock.) Once you have the place staged interview some Realtors that have been known to sell in your condo complex. Tell them you want to price it to sell. And do that. When it sells you can tell your neighbors it’s been lovely living by them but your needs in life have changed and you’re moving on. Wish them well and smile when you deposit that check in the bank after selling that condo. Then run like your hair is on fire! Find an apartment or duplex in a non-HOA controlled complex and enjoy the rest of your life. Every single day of it…HOA-FREE.

          P.S. Your neighbors may very well find out you are selling if they watch the websites for real estate listings. If they confront you, say you are making some changes in your life and then smile. Say NOTHING MORE.

          I would get the place listed by the 1st of February. I don’t know what part of the country you live in but most Realtors will tell you to have it listed by no later than March 1st. Start packing! Good Luck!

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