Rent vs. Buy

This is more of a note to myself but perhaps it will be of interest to others. As more of my friends buy houses, I can't help but revisit our choice to still rent at this point. We probably have the means to buy a place and some of the listings look quite good right now, but on the other hand the complexity it will add to our life is quite daunting as well.

As both Jaime and I value freedom and simplicity, buying a house seems to be quite counter to that. Nonetheless, I have been spending the last few weeks going through the motions of considering what it may take to own a house.

Here are some things I realize. Assuming a $650K house at Parkside in San Mateo.

• Many hidden one time cost
  - closing cost - 2% of purchase price ($13K)
  - selling cost - 6% of purchase price ($39K) - when I plan to sell my house, I will eventually have to pay for this.
  - set up cost - curtains, washer dryer, fridge, etc.. ($10K at least)
  Now, once I buy the house, the house needs to at least sell for $712K (9-10% above purchase price) for me to break even. I realize I will build up equity over time, but in the first few years, the mortgage is mostly interest building and the average house owner move every 7 years.
  
• Opportunity cost of the down payment+ one time cost - $130K + $62K- could I earn more in the stock market in 30 year with $192K than owning a house?
• Monthly / Annual Cost adds up to more than I thought
  - Mortgage - $2560 monthly ($600k house at 20% down and 4.25% 30 yr fix)
  - housing insurance - $100 a month
  - gardening - $50/ month
  - electricity - $250 a month (we don't pay any now renting)
  - fixing cost - once i own it, whatever is broken will need money and time to be fixed. Depending on how old the house is, some people budget at least $100/month for this and sometimes $10K a year. My realtor that I can purchase a home waranty that is $250-450 (a year?) or upward that could cover repair - another headache to deal with
  - commute cost - currently I walk to work in SF. If I move to the pennisula, I would have to drive or bart which adds another $200 a month.
  Now owning a $650K house would cost at least $3000 a month in Mortgage + other costs
  
• Property tax is hopefully offset by tax benefits of home ownership- 1.2% of purchase price ($7800 a year) paid semi-annually I think this is usually offset by tax benefit (as long as you don't have a cash flow problem - usually have to pay taxes first before getting the benefit). I will have to figure out how true this is.
  
• A huge commitment - once I buy, what if I don't like the area? cost of selling is high. We could feel stuck which would add a lot of stress. This leads me to think I should rent first in the new area and make sure I like and then look for a place to buy.
  
• According to Patrick.net, it's not a good idea to buy. Here is his simple rule of thumb
  annual rent / purchase price = 3% means do not buy
  annual rent / purchase price = 6% means borderline
  annual rent / purchase price = 9% means ok to buy
  $2600x12 / $650K = 5% -> according to Patrick - not good to buy. Patrick breaks it down really well on his site and helps me a lot with my learning process about real estate. You can also see his talk at Google here
  
• Condo prices may look low but HOA will kill you - A $550K condo with $400HOA seem to cost the same as owning a $650K house.

As I learn, I realize we should do the following when it comes to buying a place.

• Rent before I buy in the area - it's probably essential to rent in the area first before we buy. I applause those who can directly make the jump and buy into an area. I don't think I can do it. We enjoy our freedom and would hate to risk feeling trapped. We love where we live now - too bad it's not affordable to buy.
  
• Move based on good public school for Isabel - we don't believe in paying for private school before college. So we will move just so we can find a good public school for Isabel starting with Kindergarten. I am really leaning toward Mandarin Immersion Public school right now which fortunately is quite prevalent in the Bay area including a new one just chartered for Alameda. There is one even in Potrero Hill in the city. Will check it out soon.
  
• Make sure where we live has a high walk score (>80) - Our current place have a perfect score (100) for being very walkable everywhere to key places like grocery, shopping, restaurants, bars, public transit, etc.... We love it and Agnes and baby love it. Anywhere else we go is a step down but 80 and above would be great. There is a site that calculate the walk score based on your address. I will use that to search for listings.
• Buy a place when it's possible to rent that place for a profit. Otherwise renting is more stress free and cheaper, I think

Well, this will help me remember. I can add to it as I learn more. If you have more knowledge, pls do share. Thanks!

- Lei