Author Topic: First Time Home Buyer, Don't see the "investment"?  (Read 1556 times)

gsd802

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First Time Home Buyer, Don't see the "investment"?
« on: September 18, 2018, 06:01:53 PM »
Hello all,

A few years ago my fiance and I were interested in buying the house that we were renting.  Turns out they never ended up selling it, but here we are still living in this house.  I posted on this forum asking for advice.  We are in a unique situation...we get free housing.  My employer pays the owner of this house for us to live here and I get a salary as well for my job. 

We have always kind of had a dream of owning a home.  We are animal people, I work on a farm, she owns a horse that she boards a few miles away.  Our housing is 2.5 miles away from my job.  Its the perfect distance to get away and hide but not too far away.  A place just came up for sale half way between here and there.  It has land for the horse and the house is extremely nice, perfect size for the two of us.  We went and got pre approved.  We are both shocked in how much owning a house costs. 

What I dont understand is where is the investment?  We both have excellent credit, and for a 15 year loan we would pay 4.125% interest.  That house will never be worth more than the interest we payed in those 15 years.  Property tax in this state is ridiculous as well.  I am 29 this year, and I figured I would have owned a home years ago.  We both have dreams, but we also love the freedom of free housing.  We can save alot of money.  We have alot in retirement funds so putting even 15% down from bank savings account will clean us out. 

Is owning a home just what people do?  Do you accept the costs that go along with it for the joy of being a home owner?  We have a decent house, it needs some work but its a roof over our head and we are fortunate with what we have.  But I guess we kind of want more.  Also, my employer will give me "housing allowance" so what he pays for rent, he will put into my salary pre tax.  Of course after taxes taken out it will be less, but it still is better than nothing.

The house we live in could be sold on us at some point, and we will be forced to move or given new housing by my employer that may be less than what we are in now.  Or, we buy a house that we fell in love with now, and still be close to work (I could ride my bike). 

We are both just overwhelmed.  This house was on the market for 2 days before they accepted someone elses offer. We put in an offer too late the first time.  It just came back up for sale since the potential buyers could not get the financing they needed.

Thank you

AMandM

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #1 on: September 18, 2018, 07:01:06 PM »
The mainstream "renting is a waste, buying is an investment" view is based on the idea that a month's rent only gets you a month of housing, but a month's mortgage gets you equity in the property, so that eventually you don't have to pay for housing.  Of course, in reality this idea is defeasible in many ways.  That's why you should run a rent-or-buy calculator.  Input zero as your rent, and subtract your after-tax housing allowance from the mortgage payment when you input that.

This sounds like your dream house, is that right? If so, off the top of my head, not knowing any numbers, buying sounds like a sweet deal. You'd lock in your dream house, which you can apparently afford even without the housing allowance, and its cost will be subsidised by your employer for as long as you work there.

There are many reasons why people buy even knowing it is more expensive than renting.  Some people value the stability/predictability of knowing they can live in one place as long as they want. Some want to be able to make changes to the property. Some kinds of amenities are hard to find in properties for rent.

What are the chances you would switch jobs? If you did, would you stay in the area? What would you do for housing then?

waltworks

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #2 on: September 18, 2018, 08:27:00 PM »
Is your question really, "Why should we buy a house when we have a free place to live?"

SMH.

-W

tralfamadorian

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #3 on: September 18, 2018, 08:51:17 PM »
Quote
Also, my employer will give me "housing allowance" so what he pays for rent, he will put into my salary pre tax.  Of course after taxes taken out it will be less, but it still is better than nothing.

Would you get your housing allowance if you buy or only if you continue renting?

If the allowance is only given if you rent, then it's a no-brainer, obviously you should continue renting at no cost to yourself. If you would receive your current allowance via a salary increase, then run some of the rent vs buy calculators- the nytimes one being the most widely regarded. Don't forget to include the horse boarding costs in the calculator if that number goes to zero if you buy and the amount that the allowance would be reduced by taxes.

All the calculators presume a 30 year mortgage. IMHO there is no reasonable argument for choosing a 15 year. You always have the option of treating the 30 year like a 15 year by making additional payments without any penalties but you do not have the option of treating the 15 year like a 30 year if you reach an economically difficult period in your life.

And no, I do not consider the house you live in is not an investment. It's only beneficial to look at it that way for people for whom the equity portion of the payments represent forced savings that would otherwise be frittered away. Since you are a MMMer, I presume that would not be the case.

gsd802

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #4 on: September 19, 2018, 05:54:12 AM »
I should add that this house is a modular home, but doing research I havent seen anywhere that the value decreases over time with them.  This house seems to be very well built.  Full, clean, dry, basement along with it.  1 story home with breezeway and 3 car garage.  Also doing some more research, it seems like if we were going to go the modular route, we could build a home for approximately half of the selling cost of this home (not including concrete and land etc.).  I dont have actual numbers from contractors, but maybe after its all said and done it wouldnt be that much less expensive. 

I have been having issues with my job, it really takes up all my time.  I work long days, 6-7 days a week.  Thats just the farming way of life.  My fiance thinks that by owning a home it may give me the motivation to move on to something new.  No matter if I work for current employer or not, we love the area we are in and have many friends close by.  But by receiving the free housing, I feel like I am stuck and at a dead end.   

Yes, we would still get housing allowance if we bought a home.  It just wouldnt be as much money than having the free housing.  I always put a rent value on the house but I am now learning that I was way off (underestimated) because I never considered interest rate, property tax, and home upkeep.  Also currently we get free heat in winter. 

boarder42

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #5 on: September 19, 2018, 06:06:36 AM »
how much does the house cost? and how much is your housing allowance you need to throw down numbers for people to see if this is worth it - also how much do you pay to board the horse vs keeping it on your land for free.

gsd802

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #6 on: September 19, 2018, 06:30:37 AM »
how much does the house cost? and how much is your housing allowance you need to throw down numbers for people to see if this is worth it - also how much do you pay to board the horse vs keeping it on your land for free.

So the house is selling for $289,000.  We get $6,000 back at closing.  The land is 220 feet wide and about a mile (not literally) long to make 10 acres.  When it was subdivided that was done because a certain amount of feet was needed of road frontage and the person wanted to get as many lots as possible back in the day.  The back half is all wooded, but we have the equipment to clear it as time goes on. 

Property tax is $5,400 a year.
Homeowners insurance $85/month
Mortgage insurance $30/month (PMI?)
15 year at 4.125% $1,832 with 15% down
20 year at 4.5% 1,554,10 with 15% down

So the PMI would go away after payment number 22 on the 15 year which would cost us an extra $675.22 if we didnt do the extra 5% down payment (saving us $14,450 upfront)  Is 20% down truly necessary?

Horse board - $325 currently. 
At home horse cost, - ~$5,000 2 stall horse building, $4/day feed cost

My employer pays $900/month rent but any similar house in area would be at least $1,500 rent.  I will receive approximately $200 more per week in my salary check pre tax if we bought the house.

With the 15 year loan, and the horse boarding fee off site until next spring, and our current spending habits along with contributing the same to our retirement we would have $1,862 left over in pocket each month after all expenses.  Some spending habits can be reduced as well.  My fiance is in military and is expecting a significant raise this year so that number will be much higher. 

radram

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #7 on: September 19, 2018, 06:35:35 AM »
I am not an accountant, but something does not sound right here.

Your housing allowance should have been listed as earnings on your tax return. The way you are presenting, it sounds like you either get your housing allowance free and clear, or get it as a salary increase.

Can an accountant confirm that the OP should have been treating the housing allowance as a form of income? If not, why doesn't EVERYONE take most of their salary as a rental allowance and pay off their houses tax free in just a few years, sell it, again tax free, and then just start all over again.

What am I missing?

boarder42

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #8 on: September 19, 2018, 06:48:53 AM »
buying the house seems like a no brainer? you're spending slightly more but its buying you equity in a house if your job situation falls apart the normal numbers for renting in your area heavily skew to house buying.  you're freeing up 200 a month in horse boarding which after you account for your building is just cash in your pocket in 2 years. 

I'd be doing a 30 year mortgage if you plan to stay 7 or more years 6 or less then you do the 15 year. 

patchyfacialhair

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #9 on: September 19, 2018, 09:14:38 AM »
Are you sure you'll be there for 5+ years with a partner in the military? What happens if you buy the house and they get orders to move a year or two later?

You can play with the numbers all you want, but that's a real risk for folks in the military.

PizzaSteve

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #10 on: September 19, 2018, 10:25:07 AM »
My view is that it is wrong to think of a home as an investment.  While it can increase in value and is the largest consumer purchase you will likely make, a home is some thing you use and consume.  It is only an investment if you plan to rent it for income or own it for appretiation.

So in terms of your specific situation, you need to decide what you want to spend money on and whether that is worth it outside of your saving and investing portfolio goals.  In other words, I would treat the decision as 100% an expense, taxes and budget optimization decision.  The equity you might choose to hold is best considered 'dead money,' unless you are 100% planning and certain to sell and move to a less expensive home once you hit your retirement date.

You seem to have a good handle on the pros and cons.  Exploring the tax angles further with a professional seems well worth doing.

Just my 2 cents.
« Last Edit: September 19, 2018, 10:30:55 AM by PizzaSteve »

tralfamadorian

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #11 on: September 19, 2018, 01:59:00 PM »
...$289,000...get $6,000 back at closing. 
Property tax is $5,400 a year.
Homeowners insurance $85/month
Mortgage insurance $30/month (PMI?)
15 year at 4.125% $1,832 with 15% down
20 year at 4.5% 1,554,10 with 15% down

Yeah, those numbers don't pan out. 15yr at 4.125% with the taxes, insurance and PMI gives a PITIA of $2,471.83 not $1,832. Were your numbers just P&I?

Horse board - $325 currently. 
At home horse cost, - ~$5,000 2 stall horse building, $4/day feed cost

My employer pays $900/month rent but any similar house in area would be at least $1,500 rent.  I will receive approximately $200 more per week in my salary check pre tax if we bought the house.

Rent:
Rent: $0
Horses: -$325
Net: -$325

Buy:
Allowance: $800
Horses: -$122
PITIA: -$2,471.83
Home Maintenance (~1% purchase price/yr): -$235
Net: -$2,028.83

This does not even include the opportunity cost of your $42,450 down payment being out of the market or the $5k barn.

clarkfan1979

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #12 on: September 24, 2018, 10:10:12 AM »
If you are buying a house because it would be perfect for your living situation, you are correct that it is not an investment. If you are buying a house because you think it would be a good rental in a few years down the road and the numbers work, then it's closer to an investment.

I have bought 3 foreclosures (at different times) under market value as my primary home. I lived in them for 4 years and then when it was time to move I rented them out instead of selling. My primary focus was them functioning as a rental in a few years. My secondary focus was them meeting my needs.

In March 2007 I sold some stock to make my first home purchase. 36K down, 4K in closing and 10K in rehab. I was all-in at 50K. Now 11.5 years later I have 556K in equity across 3 properties (2 rentals and 1 primary) 40% equity/60% leverage.

If I sold everything, I would probably be left with 450K after taxes. I probably have 250 hours of sweat equity into each property (750 hours total), so it's not exactly the same thing as stocks. My typical rehab is 10 hours/week for about 6 months.

 
If I left my 50K in the stock market, my total would be 88K for a return of 76% over 11.5 years, not bad. However, I put 50K into my first ugly house which then helped me buy two more ugly houses. My 50K is now 450K, which is 900%. This is why people get excited about real estate.

« Last Edit: September 24, 2018, 10:23:22 AM by clarkfan1979 »

rugorak

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #13 on: September 24, 2018, 12:46:59 PM »
I tell people where you live is not an investment. People keep trying to convince me my house has got to be a great investment. I tell them it is a horrible investment. It can potentially be hard to sell, I'll lose a bunch of money for the right to sell it, and I am responsible for all the upkeep. To make it a good investment it would have to appreciate at such a rate to cover the amount I lose plus all the extra I have to put into it just to keep it as is. What I am doing is I am paying for my quality of life because I cannot rent what I bought. So I feel it is worth the cost.

Honestly the military fiance/spouse potentially makes buying a bad idea. As others said what if she gets sent elsewhere. Also it sounds like your current work pays the rent deal is better than what you would get if you bought. So you are taking a pay cut the way I read things.

Then I think there are the psychological side of things. Worrying about the house being sold from under you is silly. If a property is generating rent (and not costing in other ways) most people will keep it. And if they do sell it many times buyers are looking for something that will be money maker, so they'll want you to stay. I mean and that worry could be there even when you buy. The government could want to use eminent domain to get your property even if you own it 100%. So don't worry about things out of your control.

You also mention not liking your job. And your fiance thinking buying something will help you move on to something else. Honestly if you are thinking of changing jobs now probably isn't the best time to buy. What if the alternative job is far away?

I bought my first house at 38. Everything just finally was in place that it made sense. I had the 20%, a job I really liked and that has security, a wife who loves the area and wants to stay put who also has a job she likes that is fairly secure. We wanted the type of place we could not find on the rental market. We looked for 18 months before we found our house. And we were prepared to go longer. We made sure we could afford it, any maintenance, and still max our our retirement accounts.

Buy a house because you want that house and everything else is in place. Based on what you have posted it doesn't sound like you have everything in place yet. I'd save up more so you can buy if it works best for the life you want to have. Until then you have a lot more freedom. You can potentially change jobs, or not worry if your fiance gets shipped overseas. You are just renting so you can just get up and go.

aasdfadsf

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #14 on: September 24, 2018, 01:55:54 PM »
What I dont understand is where is the investment?  We both have excellent credit, and for a 15 year loan we would pay 4.125% interest.  That house will never be worth more than the interest we payed in those 15 years.

The ROI from owning your own home comes largely from imputed rent. The money you would be paying in rent to someone else instead gets paid to yourself. If you were to buy a $289,000 home in cash that you would be paying $1500 a month to rent, then you're effectively pocketing $18,000 a year in rent. That's an ROI is 6.23%, from which you must deduct expenses (taxes, maintenance, etc.), but you get to add appreciation on to that. That is...an okay return at best. But if you're already getting an equivalent place for $900 a month, then it's more like 3.74% before expenses. You're unlikely to come out ahead by buying in that case.



genesismachine

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Re: First Time Home Buyer, Don't see the "investment"?
« Reply #15 on: September 28, 2018, 05:09:44 PM »
I agree wholeheartedly that your home is not an investment. If rent = mortgage payment, the choice should always be to rent, because you must be compensated for the additional uncertainty in owning a house. Exceptions to the rule:
1 - You can make improvements to drastically lower your monthly bills (install insulation, replacing old appliances, etc...) over what you could find in the rental market.
2 - You can generate income somehow with the new property (maybe rent out a room, build an ADU and rent that out, build a separate residence, etc...)
3 - If you are buying well under market either in a temporary real estate collapse, fire sale, or foreclosure or some other scenario.
4 - You need something that you cannot find in the rental market (wheelchair access, unique property features, security system because of high crime, etc...)
5 - You are ok with throwing money out and acknowledge you are making a luxury purchase

The only pro for owning a house over renting is that you are insulated from inflation. Rent could theoretically double over 10 years like it has at multiple points in history, but your mortgage is never going to change. In my state, tax increases are locked at 3% max per year. But counting on this going into a real estate transaction is foolish because those periods of high inflation are not predictable with any true certainty.

Your situation sounds like a slam dunk for renting. I would be ecstatic to be renting vs buying in your situation.