The Reluctant Landlords and the Five Year Rule

September 8th, 2009 by Matt DiChiara| Posted in Rent vs Buy | No Comments »

Last week, on the front page of the Personal Journal section of the Wall Street Journal was a lengthy article profiling families who had bought a house, but ended up needing to move and then couldn’t sell their house for anywhere near the amount they had bought it.

Instead of taking the hit on the difference between what they had paid for it and the current market rate, they decided to hold on to the house and wait for it to increase in value. In the meantime, they are defraying some of the mortgage cost by renting their homes and waiting for a market recovery.

According to the article, there are an increasing number of families in this situation, as evidenced by the rising number of homeowners converting their insurance to landlord policies; Allstate reported a 27 percent increase over last year.

This story really drives home the potential consequences of not heeding the “five year rule,” which cautions against buying a home unless you know that you’ll be there for more than five years. Even in favorable market conditions, families that sell their homes within four years of purchase, typically pay 19 percent more as owners than they would have paid as renters. Transaction costs, property taxes, property insurance and the costs of maintenance all add up very quickly. Add to this a real estate market that has recently plummeted, this really puts some people in an extremely unenviable situation.