Welcome back to the Money with Katie Show Rich Girls and boys, fire up your engines because
today we are talking about shelter.
That was a mixed metaphor, but we're going to go with it.
Because when my husband and I moved from Dallas to Fort Collins, Colorado, I figured the
cost of living was going to be lower.
I thought, surely, this small mountain town I had never heard of would be less expensive
than the sequined cowboy metropolis that I formerly inhabited.
But approximately 14 minutes of Zillow stalking later, I realized that I had made a dire miscalculation.
Not only was the Fort Collins housing more expensive, but it was a lot more expensive.
I don't know if it's the proximity to the mountains or if it's the mass pandemic migration
of other Texans and Californians, sorry, seeking cooler climates and an abundance of super
foresters, but our new cost of living absolutely trounced our old one.
Our rent as a result jumped from 1741 per month to around 3000 per month.
And I lost a lot of sleep over it.
Though to be fair, we did upsize from a two bedroom apartment with single family home.
But with two people, one of whom worked from home, you're truly a 75 pound dog and a cat.
We are basically on top of one another.
So the extra space did make a lot of difference.
And we had toyed with the idea of buying.
We never really thought about it seriously, because Colorado real estate was very expensive.
And we knew that we'd be moving again in a couple of years for Thomas's next military assignment.
But then came late spring 2023 when we learned we'd be moving to the Sacramento area.
And the rent versus by question was back on the table.
Now, the NorCal region outside of the Bay area, obviously, was much to my surprise.
Actually a lot cheaper than Northern Colorado.
So by now, you've probably deduced at least two things.
Number one, my intuition about real estate prices by region is clearly terrible.
And number two, whether to rent or buy our primary residence,
has felt like this omnipresent financial dilemma.
So that's what we're chatting through today.
And our guest is Emily McDonald, a rentals communications manager at
Zillow.
I can hear all of your millennial ears parking up.
And she's going to weigh in on our choice to continue renting and provide a few other considerations.
We'll be right back after a quick break.
All right, so first things first, let's look at real estate in 2023 at a high level.
Because we've done deep dives in the past on this show about how to calculate housing numbers.
We'll link our most recent ones in the show notes.
But the real estate environment in 2023 is interesting.
We're on the other side of a huge run-up in prices post 2020.
And we're also facing some of the highest interest rates since the early 2000s.
Since the Fed was all like, oh shit, the sucker is running way too hot and we need to slow it down.
So as a result, housing affordability, it's out of historic low.
I love that for us.
A redfin analysis looked at the 100 biggest U.S. metropolitan areas and found a significant drop
in affordable homes.
Now, affordable is defined as the monthly mortgage payment being no more than 30% of median income
in a county and in 2013, half of homes met that criterion.
And in 2022, only 21% of them did.
You probably already know this if you're a human who, I don't know, requires sheltered,
who survived, but it's worth revisiting that broader economic context because it illustrates
why this rent versus own dilemma has shifted so dramatically over time.
The conventional wisdom that owning is always financially beneficial, it was born in an era
where homes were affordable on one median income.
And the prices were basically guaranteed to go up thanks to policies that helped to buffer
home values like the 30 year fixed rate mortgage or zoning restrictions or mortgage interest rate
deductions. But much like the college decision has shifted as the price of admission has gotten
so much steeper, things like these evolve and whether your results are going to be net positive
or net negative typically comes down to the details.
In that way, you should always own your home is a little bit like the advice to always get a
college degree. These statements used to be true for nearly everyone regardless of the circumstances,
but now it's a little more complicated. Their validity today is a little more nuanced.
And I talked with Emily about how the pandemic changed people's preferences.
To start off, I would say the housing market in general is very different than what we
were seeing three, four years ago. The biggest call out for the rentals market is that people
are renting for longer. The cost of home ownership is so high so people are starting to have families
going through life events that used to trigger home buying now staying renters for a bit longer.
And that changes what they want in a rental. You know, people are wanting more space.
A lot of people that aren't starting families decided to ditch their roommates,
live in a studio or a one bedroom alone instead of sharing a TV with three other people like
I used to be doing. And I think one of the biggest things too for renters and many people during
the pandemic, a lot of people adopted pets. So Katie, I know you have pets. I have two cats of my
own one of which I adopted during the pandemic. And on Zillow, we're actually able to see what renters
are specifically searching for. And pets allowed by far and away is the number one filter that renters
search for. In most markets, it's number one, some markets it's number two behind in unit washer
dryer, of course. But what people are looking for, they want to make sure that their pets can
go to their next rental. Really unusual circumstances of the pandemic shifted what people were interested
in. I thought when all of that was starting, that we'd see a bit of a quote unquote return to
normalcy and that those more standard, if you will, preferences would kick back in after a certain
period of time. Are we not seeing that right now? It really does depend on where you are looking.
I would say though, in some big cities like New York, San Francisco, those places where there was
this quote unquote return to cities, return to the office, we are still seeing people feeling like
they want to have their own space live alone. People had got adjusted to what they were experiencing
during the pandemic and maybe, you know, having that extra money being able to go and live alone,
that it's then now driving prices back up because people still want that. People still want to be able
to live on their own, live in a one bedroom as opposed to sharing a space.
And then there are the factors I personally considered when facing this dilemma. So we're going to
walk through the numbers of our decision to continue renting in the hopes that you'll be able to
map my thought process on your own criteria and gauge what makes the most sense for you.
So when I'm thinking about a decision, this huge, there are four financial factors that I am weighing
most heavily. Number one is transaction costs. So the upfront transaction costs to purchase
home are pretty tremendous. Rocket mortgage estimates the average costs that closing will be
between 3% and 6% of the loans value. So that means if you are purchasing a $500,000 home,
you're going to pay between $15,000 and $30,000 when you close. Now this is the cost of merely
completing the transaction, right? Because of this, how long you plan to stay in that home
is one of the most impactful factors in your outcomes because the costs to switch are so high.
Emily's going to cover that a little bit more later.
Number two is property taxes and insurance in the area. So if you live in an area that's known
for tornadoes, hail, hurricanes, other natural disasters, or if your insurance company just thinks
that you do, your cost insure may come as a bit of a surprise. So property taxes are another major
factor I like to consider. In Fort Collins, property taxes are below the national average. They're
around 0.65% of the home's value. So for a $500,000 home, this is going to be about $3,200 per year,
which I would consider very reasonable. And that was a major reason why we felt kind of compelled
to consider buying because it seemed like, yeah, you know, it could be kind of a good area. But
that was until I saw how expensive everything was and I promptly curtailed the idea. Now,
Henna's former place of residence, Jersey City, for example, has a property tax rate of 2.17%,
meaning she would pay $10,850 per year or three times as much in taxes on the very same home.
Number three is interest rates. How expensive is it to borrow money? Now, just a few short years ago,
borrowing money was pretty cheap. If you had good credit, you could get a 2.5% interest rate
on your mortgage, which is basically free compared to what we have now. The average 30 year fixed rate
is 6.96% as of today, July 12, 2023, which was basically the nail in the coffin for my consideration
to buy this time around because at that rate, the opportunity cost of my down payment and the cost
of my debt long term would be so high that it just became hard to justify when compared to the
alternative, especially since we will not be living there for a long time.
And my last one, okay, this one's a little bit harder to quantify and I would say it's far more
personal to me and my easily flustered personality. But I was also concerned about the opportunity
cost of the mental load. My primary source of income is my job, which I try to devote most of my
brain power and energy to. Now, our criteria for a home that we would buy would be pretty high
as it would need to be a spot that we could feasibly keep and rent out after leaving to cover our
costs. So between the house hunting for such a residence and the number crunching for what would
become the largest purchase of our lives, I started to realize that the process of buying and
maintaining would be kind of time consuming and onerous. And I was concerned about losing a few
months of momentum at work. It just did not seem like the highest leverage use of my time at this
point in my life given the way that I make money. So at this point, it looks like I'm painting a
pretty bleak picture of buying a home in 2023. And that's not too far from the truth.
Historically, it's not a great time to buy, but as with all things, real estate and interest rates
are cyclical. So it doesn't mean that that's always going to be the case. It's also hyper,
hyper local and very specific to how long you plan to stay in the house. So despite the headwinds,
if your area is on the more affordable side of overvalued and you plan to live there for the next
20 years, your timeline is probably going to smooth out just about all of the gnarly factors that we
are highlighting. And of course, you get to have a house to live in for the next two decades,
which kind of cool. I also asked Emily to weigh in on what she thinks is the key when deciding whether
it's time to buy or better to keep renting. So I think the biggest piece that people do not consider
when they are on the fence about renting versus buying is the length of time that they are going
to be in that next home. You know what that break even point is where you'll have more money in
your pocket for renting versus you'll have more money in your pocket from buying. So yes, buying a
home is a good investment, but only if you plan to stay in it for a certain amount of time. And
there are a lot of tools that can help you calculate your break even horizon, but you do need to know
a few things like what your budget is, how much homes are going for in your area, what your
rental budget would be. So let's explore the actual numbers and parameters my husband and I
looked at because when we considered buying a home, we noticed a few things. So according to
Zillow, the median home value in Sacramento, the city of Sacramento is currently $466,942,
which is actually down 5.7% year over year, but we noticed the homes in the suburb north of the
city closer to the base were going for anywhere between the mid $500,000 range and mid $900,000 range.
So we set a tentative budget right in the middle at $750,000 because we decided we could tolerate
if necessary a 20% down payment on that amount or $150,000. I estimated that would mean between
$22,545,000 in closing costs. So out the door, we're looking at between 172,5 and 195K in upfront
costs just to get the keys. And that is, of course, assuming we can score something great for that price.
With the property tax rates in our new town, we were looking at an annual tax bill of about $8100
on a home of that value and estimated annual insurance costs of around $3,000 on average,
according to the online calculator I found. So lots of ironclad research happening here.
And finally, the big one, the mortgage. My credit score is in the 700's last I checked and we
would be avoiding PMI with that 20% down payment. So Google spit out 6.74% as the estimated
interest rate, which not going to lie seemed kind of high to me, but I didn't want to pat it just
in case that was accurate. So this means our all in monthly payment was looking like it was going
to clock in around $4,821 per month after our upfront costs of between $172 and $195,000.
Not great. I didn't feel super optimistic about these estimates because I also knew that they
represented the absolute minimum we were going to be on the hook for as owners of the property.
And at $57,852 total per year, that meant our cash input over years one through five would be
$461,760 at the low end. A little fast math, i.e., an amortization calculator, told me that that meant
if we sold after the last month of year five, we would have $563,234 on the loan left to pay back.
In order to break even, we'd need to make back our cash input that we've already had 461,760
and we'd have to have enough to pay back the $563,234 on the loan, which means the home would need to
net $1,024,994 after broker fees for a sale price of approximately $1,090,000 or just shy of 1.1
million if you assume 3% fees from both the sellers agent and the buyers agent.
This means our hypothetical home would need to appreciate by around 8% per year every year in order
for us to break even assuming no maintenance, no renovation costs. The average annual appreciation
in the area since 2000 was 4.15%, and as we've noted, it's down 5% year over year right now,
so I didn't feel super comfortable banking on that given the expected timeline of our ownership
that seemed most reasonable. And like I said, we also considered the idea of renting out the house.
In the event we want to leave after 2 years when my husband Thomas retires from his 4-year
commitment to the Air Force, but in looking at market rents, we didn't think we could realistically
get $4,800 per month for a $750,000 home. I spent a lot of time exhaustively clicking between
the rent and buy options in Zillow in that area. And anecdotally, it started to seem to me,
like the homes that were renting for that 4,800 to 5,200 a month range that we would be looking
forward to feel comfortable were worth well over a million dollars. So I didn't feel super
confident that in two years from now, we were going to be able to cover our housing costs
and the cost of property management since we probably would not want to be out of state
property managers with the rent that we'd be able to get for that type of home. And finally,
I asked friends who invest in real estate for their opinion, and they kind of cautioned me
about investing in rental property in California because the laws around rental property investing
are a little more stringent there than in other parts of the US. So to wrap this up, in other words,
I was really hoping for my first home purchase to just look like a slam dunk, at least on paper,
right? And nothing about the way this situation was shaping up screamed, this is a great deal to
me. So there you have it. We decided to keep renting. It probably goes without saying that we
are not, quote, breaking even over the next five years. Anyway, we're going to be spending money
that we're not going to get back by renting. We used Zillow to find our spot. And I am excited
to move in because I got to tell you, I am pretty relieved that I'm not going to have to worry
about repairing a roof or replacing an HPEC system in my time in California. Emily had some
additional thoughts on how best to describe the rental markets right now. Right now, the
rentals market is actually on its way back toward normal. So we are shifting toward a quote-unquote
normal market. Right now, the rentals market is super seasonal every year. I mean, during the
pandemic, things got a little honky and a little crazy. But in a typical year, summertime is when
demand really rises. We see those prices start rising. And that's exactly what's happening now.
Last year in 2022, Zillow saw the fastest rate of rent growth of all time that we have ever seen.
So it peaked in February 2022 and the rate started coming back down.
Rent prices even started to cool last winter. And now they are taking back up. But that is what we
expect to see in a typical summer season. And that record pace of growth from last year, we really
are economists do think that was a one-time event based on the return to work and the return to
office. People again, looking to live on their own or ditching their roommates. So really,
we think that was a one-time event while rents are rising again, which isn't the greatest news for
renters, it is quote unquote normal. And that is good news for renters. My hot tea is winter.
I rented in the winter and there are fewer options, but landlords and apartment buildings are
more willing to negotiate with you. I have found it that time. So while you have fewer options,
what you're going to end up paying and the concessions on your lease might be a little bit better.
And we'll be right back after a quick break.
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Okay, so we're back to the conundrum that we're all facing because the other frustrating thing
about 2023 is that while it is not historically a great time to buy, rent is also expensive.
So while I feel like I'm choosing the lesser of two evils at least at this point in time,
renting is probably not going to be a financial walk in the park either.
Still, renting is in my comfort zone. It is so much simpler because the sticker price
is what you pay for that year. There's no surprises. Within reason, obviously rent increases can
and do happen, but you're dealing with fewer variables and shorter timelines and all around
known quantities. So I have a bit of a renting paradox that I'd like to share.
My paradoxical view of renting is that I am personally a little more willing to splurge on a
luxurious place as a renter than as a buyer. And that might seem counterintuitive because you
might be like, wait, wouldn't you rather splurge on the thing that you're going to be paying off
for the next 30 years? But that timeline is precisely the reason. With rent, I am dealing with
those aforementioned limited quantities. The monthly cost will be X for the next 12 months.
Should something happen between now and then? I know the time period of my commitment is limited
and it is flexible. And I'm pretty confident about how my income will shake out over the next 12
months. Whereas my income three years, five years, 10 years from now, that is a lot more uncertain
and a lot more unknowable. So please keep listening to this podcast. Love you. I don't want to make
permanent decisions about a five times leveraged purchase, a K a home with a 20% down payment
based on my income and lifestyle right now. Because in a few years, who really knows the amount
of house that the online calculators will tell you that you can quote unquote, afford is outrageous.
So as a result, the estimates are going to be based on best case scenarios that your income is
going to say the same or go up. You're not going to have any major repairs or renovations.
You don't have any other debt coming into the picture. And of course, you can always sell and move.
But if you're doing so because of a major change in income or lifestyle, you might find yourself
selling at an inopportune time. And as we've probably all noticed in the last couple of years,
timing the housing market is kind of a huge factor in your outcomes. That said, the long-term
ramifications of buying conservatively will almost always trump renting luxuriously if you plan to
stay in the same spot for many years. But in our case, our move is temporary. So let's talk about
what I call the total cost of leasing equation. Because before I sign a lease, I like to run a quick
calculation. What is the all-in cost of this lease to me? In other words, for the 12 months that I
am going to live here, what amount will I be legally on the hook for? Now, this is a different calculus
than what we typically run with renting, which tells us to look at our monthly income to decide
how much we can comfortably afford. And I'd still consider that a very necessary first step as part
of that 30% rule, figuring out the all-in cost of the lease is a necessary second one.
Because while the answer to the former question works out well as long as your income stays the same,
the answer to the second one is going to ensure that you are capable of fulfilling the legally
binding contract you are signing no matter what. This is a bit of a worst-case scenario style
equation because it's going to help you contextualize your annual housing costs against your current
cash cushion. So for example, if you're considering rent that's 3,000 a month, your total cost of
leasing a year will be $36,000. And if you have $10,000 in cash savings, you have no other liquid
assets. In other words, no assets outside of retirement accounts that you can't touch. You may
consider renting something less expensive or prioritizing building up that savings amount.
The intent with annualizing this number is to make sure you could fulfill that lease even if
you were to experience a total loss of income. So it's a bit of a piece of mind-check.
I would also recommend checking the lease agreement for the language around early termination fees
because at the bare, bare-ass minimum, you want to be able to cover those costs easily out of
pocket in the event you suddenly need to move or lose your income, whether voluntarily or
involuntarily. And for whatever reason, don't anticipate it coming back. And there are other
reasons you may realize a lease isn't working out for you, which brings me to my next point.
Is it worth it to sign a longer lease to lock in lower rent? So when we signed the lease for
our new place, we had the option to sign for 24 months instead of 12. And that was tempting,
but we decided to start with 12 months for a few reasons. And it can be helpful to
calculate what all called a flexibility premium that you are willing to pay.
The first reason is that we're totally new to this area, right? We want to allow for changes if
something does not work out as expected. Maybe Thomas's commute will be too long or the neighbors will
have a teenager who plays the drums or our income is going to unexpectedly change. You don't
know what's going to happen. So we want to give ourselves that full flexibility. Number two,
our rent is going up by about 2000 a month, which is mostly offset by the increase in Thomas'
basic housing allowance, which is provided by the Air Force because it's scaled to the cost of
living in the area that surrounds the base. That said, we're not really sure how it's going to
feel to pay a higher price. And we want to allow ourselves the flexibility to downsize again
after a year and the event that it's really not a great fit. And lastly, number three,
the cost to break a lease is typically one month of rent, but your lease will specify. So in our
case, we knew terminating before the one year mark would mean paying about $5,000 in early
termination fees. So that works out to about $416 per month if you amoritize it over the duration
of a 12 month lease. So in my mind, I'm thinking as long as our rent in year two goes up by less
than $416 per month, the price of flexibility is less than the potential cost of breaking a lease
if we were to lock in that rate at 24 months and then needed to break it for some reason.
So in order to come out ahead by choosing the shorter term and risking it, the annual increase
in costs would have to be less than $5,000 in year two. So if you think it's reasonable to
expect that your rent would increase by more than the early termination fee amount divided by 12
months, it might make sense to choose the longer term, the 24 month term as opposed to 12
and risk the penalty fee if it doesn't work out. Okay, finally, let's talk about deposits because
anytime you're signing a new lease, you got to remember there's a bit of a mini down payment
required often in the form of security deposits, your first and last month's rent or any applicable
pet deposits. And if you're lucky, you'll get a combo of all three. So depending on your monthly
rent, this can add up pretty quickly. Sometimes it's highest three months worth of rent upfront,
though the deposit is hopefully going to be refunded to you. And getting a security deposit back
from your former landlord may help offset some of this in the medium term. But just remember,
you'll likely be paying deposits for your new spot before the old one has returned your deposit to
you. So another reason to keep a healthy amount in savings. Now, if you plan for this, it's not too
painful, especially because some of it is going to come back to you at the end of the lease and the
rest goes toward your regular cost of renting. But it can be a pretty large sum up front, which
takes people by surprise sometimes. And of course, there are a few harder to quantify considerations
that played into my decision that are likely going to play into yours too. While our new lease
is affordable in relative terms, I think in absolute terms, it's still way more than I expected we
would ever spend. But where we live matters quite a bit to me for a couple of lifestyle reasons.
Number one is I work from home, which means I spend the vast vast majority of my time
in my house. If I worked from an office five days a week, I'd probably feel a lot less strongly
about my surroundings because I don't mind living in a less than ideal apartment when I barely
spend any time in it. And we looked at some of the more affordable homes in the newer subdivisions,
but the surrounding area had very few trees or green spaces, which in the Sacramento area means
you're going to have a lot of heat. And I kind of worried about the middle of nowhere subdivision vibe
and that that would start to feel a little isolating over time because I spend most of my time
in my house. And when I do leave the house, it's usually to go on walks, especially with the
dog. So proximity to nature makes a really big difference to me. Same with proximity to a grocery
store because I now cook most of my meals at home. What up? One of the homes that we looked at was
beautiful, but it was 20 minutes from the nearest store. And I knew that inconvenience was really
going to compound over time. And my third reason is that we don't know many people in the area,
as in we know four people total. So it's likely we are going to be frequently coercing family
and friends to come visit. And our home in Colorado did not have a guest bedroom. So it was actually
kind of hard for people to visit us without having to spend money to stay in a hotel. So we really
wanted our new home to have a guest room so we could host out of towners more easily.
And so I give you all of these reasons to highlight that depending on your lifestyle concerns,
your priorities could be the polar opposite of mine. You might be an avid restaurant goer who works
in an office who would much rather get a cool studio apartment in the middle of downtown that's
going to be walking distance to your place of employment and the nearest bar. And I won't lie,
finding all of this on Zillow definitely did make the search easier for me, which is why I was
excited that we could get someone from the rentals team to join us today. And I intentionally
tried to find homes that were being rented by their owners rather than a property management
conglomerate because I have had far better experiences that way. Here's what Emily shared about
ways that you can use tech to your advantage when you are beginning the search for yourself.
I live in Jersey City just outside of New York City, a city full of renters. And when I talk to my
friends about my job and they ask me advice when they're renting, I'm so surprised about how
little they know about the technology available to them to help them make the rental process
just so much smoother. So I think the greatest asset a renter has is time, like the time that you
have especially in a competitive market like it is right now, you want to be one of the first
people to apply to that space. And using tech tools like the touring options available to you online
can really help you save that time of meeting to go to 10 apartments on a Saturday and look at them.
If you're using 3D tours like we have on Zillow, you can even see a full property map of an
apartment building to know exactly where your unit is going to be. So what your view is like,
and if you're near the busy elevator or the garbage room, like there are ways that you can cross
apartments off your list without needing to go visit them in person instead of wasting time
and going to tour that space. So I think that is a big one. And then on the money with Katie,
so I think we're all looking to save both time and money. Katie, I think you might have mentioned
that you use this tool. There's actually a universal application that renters can pay a one-time fee
over the course of 30 days and apply to as many applicable apartments as they like.
So that seems you money because it's a $35 one-time fee. And then it's also saving you time,
I'm filling out form after form. If you want to apply to five different apartments,
that's a lot of filling out the same information about yourself. So this one-time form really
just helps keep things moving and also saves money in the long run. We've used that twice now,
both for our house in Colorado and our house in California. But I'm curious, these are both the
markets that I'm in. They're mid-tier, small-ish towns. Are there any rental markets where that's
less common to find where you are probably not going to see that as much or is it kind of hit or
miss? That's a good question. It is hit or miss because the universal application applies to
smaller landlords. So the people that can opt in for their renters to use the application fee
and the universal zillow application are smaller landlords that own one unit to, let's say, even up
to 20 units. My favorite. Same, same here. Small landlords. I'm like, I want to rent your primary
residence. I don't want to talk to a property management company ever. Yeah, I totally get it.
There are total trade-offs to renting from a big apartment building to renting from a very
small landlord that you have a direct relationship with. So I totally get that. It is available
in every market across the country. If this is something that you are dead set on wanting to use
and, you know, you say, I want to spend the $35 and finding the apartment that way. You can even
filter on zillow for apartments that take the universal applications. Overall, I have long believed
that our environment has a major impact on our mood and our mental health. So in my opinion,
for me personally, it is worthwhile to pay a premium for the things that will be most conducive
to the lifestyle I want to live. And in this case, it is living in a home that's near nature
and has a guest bedroom. For some people, the premium they're willing to pay for is stability.
They may want to buy a home despite it being net and more expensive because they want the
stability of knowing that they're going to be in the same place for a long time. And I fully
support that, assuming you can afford it, of course, because I wouldn't be a personal finance
podcaster unless I said that. But we want to hear from you. What are your considerations when
you're picking a place to live? Anything that came up for you today listening to this that maybe
you didn't even realize was important to you. And how are you making the rent versus buy decision
in 2023? Send us an email at MoneyWithKD at MorningBrew.com.
All right, y'all, that is all for this week. I will see you next week, same time,
same place on the MoneyWithKD show. Our show is a production of Morning Brew and is produced
by Hannibaliz and me, Katie Gatti Tossan, with our audio engineering and sound sign from
Nick Torres. Devon Emory is our Chief Content Officer and additional fact checking comes from Kate Brandt.