Our Frugal Ways: Rent for a Few More Years Before Buying

During the real estate bubble years, the price of the houses was just ridiculously high and it comes to the point that it is no longer affordable with the current income levels. People who bought their homes during that time were only able to do so because of the toxic loans, which offer teaser rates but resets to a much higher rate after the initial period causing the monthly payments to increase dramatically.

Currently in our area, the price of the home has still not gone down to the level of affordability. With a median price of $300,000, you have to have a household income of $110,000 for you to be able to afford it using the conventional way and not those ARM. So the concept of renting and saving the difference (from the cost of home ownership) is probably better for a few more years. You see, I’m not even talking about investing the difference in stock; all I’m just talking is stashing it in the low-yield federally insured savings account. And when I have enough savings, I can actually use this as a down-payment and buy the house when the income levels off with the cost of home ownership.

Let’s look at the following scenario:

Here in the area that I live in, the average rent for a two-bedroom and two-bathroom apartment is $1,400 and the median price for a 2-bedroom and 2-bath home is $300,000. The PITI for the house is an estimated $2,200 (at the current average rate of 5.25% interest rate plus property tax and insurance). Now you have to add the additional cost of homeownership and let’s assume it is about $400 per month so the total cost really amounts to $2,600. When I postpone my home purchase, I may be taking a risk that the house would appreciate fast. However, at this real estate market, more experts are indicating that homes would probably stay stagnant in the Los Angeles area in the next three years, meaning no appreciation. If this is the case, I am better off renting for these three year span before buying a house after that time period.

Assuming that I can buy a house now and I can afford to fork the $2,600 monthly payment but i decided to stay put and rent an apartment for a while at the ongoing rate of $1,400.

Owners Equity After Three Years

• Monthly Housing Budget: $2,600
• Monthly PITI: $2,200
• Additional Cost of Ownership: $400
• Appreciation Rate for the next three years: 0%
• Amount Leftover Every Month: $0
• Amount Saved in Equity After Three Years: $10,800

Renters Savings After Three Years:

• Monthly Housing Budget: $2,600
• Monthly Rent: $1,400
• Amount Leftover Every Month: $1,200
• Amount Saved at 1% after Three Years: $40,000

For the owner scenario, out of those $2,600 payment chances are only $300 of those are applied towards the principal meaning I have forked out $2,600 to save $300. So the equity or the equivalent savings, assuming that there is no appreciation for three years as predicted is only $10,800.

Now let’s take a look if I kept on renting for the next three years. Assuming that I am capable of paying the $2,600 per month similar to the owner scenario but I just sticked to renting, I can save the $1,200 difference if my rent is only $1,400. If this amount is deposited on a 1% interest rate right now, I would be saving $40,000 during that three years wait time. Now after that three year span and without any appreciation on the house, I can then buy the same house at the same price. The difference is that I have an additional $40,000 that I can use towards the down payment. This would only work at this time because of how real estate market is currently correcting itself. In the long run, owning and price appreciation of the house will more than likely to beat renting and investing the difference.

In our case, our rent is only at $875 for a 1 bedroom 1 bath apartment. The apartment pays for the trash and water and gas, so we are only paying for the electric bill, which averages at around $20 per month. We are planning on purchasing a 2-bed 2-bath as a starter home in the future and can actually afford the around $2,300 per month mortgage payment but it would be too tight and I probably need to make a few extra on a part-time job or venture so that we can have extra savings on the side. So we decided to keep renting and just save the difference ($2,300 – $875) for another two or three years.  If I use the above scenario, I would have more money that I can use towards the down payment of the house and would probably come out better than if I purchase the house now (assuming that the real estate market stays stagnant as experts say for the next two to three years).

Another reason why we want to postpone buying the house even if we can afford it now is that my wife is still in school and will be graduating this year. When she finishes school, she will be working and we will have additional funds that we can use. As a result,  we might end up buying a better house in a better location so rushing to buy the house now does not really make sense since we may have more options in two to three years.