Author Topic: select first home with care; never move or upgrade  (Read 1264 times)

SnackDog

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select first home with care; never move or upgrade
« on: August 26, 2017, 07:52:02 AM »
Many people purchase their first home as soon as they can afford anything, then sell/buy/switch homes every several years by moving cities or upgrading.  These moves incur huge real estate fees, moving costs, and, worst of all, reset the mortgage clock.  The first 10-15 years of mortgage payments are mostly interest.  Start a new mortgage and you are starting over at the bottom.

If you want to optimize this part of your life, wait a little longer until you have the perfect house in the perfect location in the perfect city.  But that and stay forever.  Warren Buffett's modest house in Omaha is a good example.  He could afford something grander in say, St. Tropez or Central Park West, but he stays mostly in Omaha.  Many people get a little money saved or maybe an inheritance and then the urge to "upgrade" or make more room for kids.  Never fall into this trap.  If your first house has three bedrooms you are set for up to five or six kids.  Three kids can easily share a room even in high school.  And if you have that many kids, you definitely can't afford a larger home as you need the cash for food and clothes.

I see a lot of people fall into the trap of upgrading homes after the kids move out as well; some are the same idiots who bought a five bedroom house and now want to downgrade to three or two bedrooms. Another huge waste of real estate fees, moving costs and potentially restarting at the bottom of the mortgage ladder.  These people are working an extra 5-10 years to afford all this real estate swapping.

By avoiding these real estate pitfalls (I've made plenty myself and watched others who did the same), one can minimize living costs and allocate all the cash for other more valuable things.
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lizzzi

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Re: select first home with care; never move or upgrade
« Reply #1 on: August 26, 2017, 08:00:54 AM »
Some good points there...and yes, in an ideal world we would all do that. But sometimes moving is necessary--the imperative can come out of nowhere--and there is no way to get out of it.

Michread

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Re: select first home with care; never move or upgrade
« Reply #2 on: August 26, 2017, 09:00:43 AM »
Yes and no.  We purchased our home 25 yrs ago on a 15 yr mortgage.  We spent 30k on pool and yard 20 yrs ago (so worth it) with inherited monies.  Then added a sunroom and some upgrades 15 yrs ago with more inheritance. 

My advice to my sons would be to buy a 2 family, live in it and eventually move to a single family.  Never selling the 2 family but use it as income and then eventually sell the single family and move back into 2 family when older and done with raising a family.

Dicey

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Re: select first home with care; never move or upgrade
« Reply #3 on: August 26, 2017, 11:49:29 AM »
It's easier to give this advice than to apply it, due to the scarcity of crystal balls. Sure, you can make educated guesses, but they're still guesses and real life is unpredictable.

Two anecdotes, not data.

Friends the first knew they wanted children. They waited until they could buy a kid-friendly house in a kid-friendly area. They've since been unable to conceive. They now feel their "sensible" home and neighborhood mock them.

Friends the second knew they had fertility issues, so they bought a modest home. They had medically engineered twins. A few years later, they had a surprise conception. Now they're busting out at the seams, but their work outlook has changed and they can't afford to move.

I like Michread's idea, but two-families are scarce and expensive in my corner of the world.
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ender

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Re: select first home with care; never move or upgrade
« Reply #4 on: August 26, 2017, 03:29:23 PM »
So basically make intelligent and strategic home decisions instead of buying on a whim?

Your assumptions are a lot more relevant for non-MMM people too. If I can "reset the mortgage clock" (which arguably isn't actually a bad thing given how low rates are now) by buying a house when I move to get a much better job, why on earth should I not do that?

stashyMel

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Re: select first home with care; never move or upgrade
« Reply #5 on: August 27, 2017, 03:53:41 PM »
I agree with your thoughts. Many of our friends bought a home right after marriage because they were expected to have one. But they bought houses that were far too small or had structural defects, etc. We bought what we call the second house but it was our first. By waiting a while after we got married and we could not longer stand an apartment, we moved into a 3 bedroom home that met our qualifications for a forever home. The housing market in my area has not gone up so our friends did not gain from moving up. Many of my coworkers are now buying McMansions as well. If I want to work a few more years, I would join them. However, our 1500 sq ft ranch with finished basement will suit us until we decide that we might move into a smaller retirement house or stay where we are.
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Re: select first home with care; never move or upgrade
« Reply #6 on: August 27, 2017, 04:05:10 PM »
In Australia there is a term called "rentvesting" where people in high COL places hang onto their "starter home" (2 bed unit) and rent it out while they are raising their family in a larger house that they rent. Transfer costs are very high here as the "stamp duty" (realestate sales tax) was set before the most recent property boom so is very high (it is calculated as a percentage).

The reason I write this is that it is a good example of how investment decisions can be decoupled from decisions about where to live. Unfortunately it may get harder to DIY things if you have tenants and so you're throwing away some sweat equity possibilities by following the "rentvesting" model.

Pennycounter

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Re: select first home with care; never move or upgrade
« Reply #7 on: August 27, 2017, 05:27:03 PM »
In Australia there is a term called "rentvesting" where people in high COL places hang onto their "starter home" (2 bed unit) and rent it out while they are raising their family in a larger house that they rent. Transfer costs are very high here as the "stamp duty" (realestate sales tax) was set before the most recent property boom so is very high (it is calculated as a percentage).

The reason I write this is that it is a good example of how investment decisions can be decoupled from decisions about where to live. Unfortunately it may get harder to DIY things if you have tenants and so you're throwing away some sweat equity possibilities by following the "rentvesting" model.

What a great approach! We are sticking with our house for now because we have so much equity from property value increases that we'd have large transfer fees and our tax cost basis would reset. I do wish we had more space...

talltexan

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Re: select first home with care; never move or upgrade
« Reply #8 on: August 31, 2017, 07:27:38 AM »
I agree that the transaction costs associated with buying/selling homes are under-appreciated by most people.

But you also get better at buying a quality home the more often you do it. I think it would be very hard to identify a good home the first time you do it.

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Re: select first home with care; never move or upgrade
« Reply #9 on: September 09, 2017, 08:55:09 AM »
I think the intention of buying a home you can see yourself live in for 30 years plus is always a good idea there are to many variables that can effect that thinking as time goes on. Job changes, neighborhood changes, value changes and many many more. But in theory , nothing wrong at looking at it that way.
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nereo

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Re: select first home with care; never move or upgrade
« Reply #10 on: September 09, 2017, 09:39:23 AM »
I don't know that this is a good approach.

For certain the desire to 'upgrade' into fancier and larger homes is a wealth trap any smart mustachian should seek to avoid.
BUT - the kind of home that I will want in my 60s is almost certainly different than what we desire now in our 30s. 
Part of our strategy runs counter to what you suggest; namely buying the sort of home which suits our present lifestyle (and presumably one we will be happy with over the next decade or so) - and then downsize/shift whenever the circumstances shift.

Yes that may incur additional buying/closing costs, but the counter-strategy will avoid owning things that fit one stage in our life but not another. 
I've always been skeptical of the idea of a "forever house." To each their own.
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englishteacheralex

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Re: select first home with care; never move or upgrade
« Reply #11 on: September 09, 2017, 09:51:19 AM »
Great reminder. Our whole long-term money plan is predicated on this concept, but it's easy to lose focus.

Our situation: we live in Honolulu, where a modest 3/2 SFH in our neighborhood is selling for $825k. I know because I check the MLS every day and saw this modest $825k pop up a few days ago. Three friends of ours own $1mil+ houses. It never fails to arouse our fantasies when we hang out with these friends at their houses.

Two years ago, inspired by rising rent and our growing family, we decided it would be a good idea to buy a modest 3/2 condo in an unfancy neighborhood for $364k. I'm sure that sounds astronomical but it's pretty reasonable in Honolulu. The condo we bought has already appreciated $35k--identical condos in our building are now selling for $400k+.

The condo is small. We now have an 8 month old baby and a 3 year old. It's 850 square feet. Kind of hard to picture the kids growing up in this little space, but all the immigrant families around us seem to manage and most of them have more kids than we do.

We have to stay in this condo if our plans are going to work. We are projected to pay it off in the next 10 years and then go at retirement with a vengeance until the kids are in college, which we plan to cashflow on top of the savings we've earmarked for college.

Cashing out the equity and trading up for a million dollar SFH might get awfully tempting, but we can't be seduced by the siren song of a yard and a deck and a real living room.
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horsepoor

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Re: select first home with care; never move or upgrade
« Reply #12 on: September 09, 2017, 03:55:10 PM »
Depends.  I made a huge profit on my first home, which I bought in a town I had no intention of staying in.  I chose it on the basis of it being the only house available in an area where I felt semi-safe as single young woman.  I would have missed out on netting about $60K in profit after living in it for two years (mortgage was within $50 of what I was paying for an apartment; sold it directly to a co-worker, so no real estate broker fees).  There was a huge element of luck in that I bought it in '04 and sold in '06. We did lose money on the house we bought in '06, but the losses were roughly balanced by what we would have paid in rent over the four years we lived there, and rents we collected for two years we owned it after buying our current house. Current house is too big and I'm sure we'll downsize at some point, but it has doubled in value since we purchased it, so we should be able to use the equity to pay cash when we buy our next house if interest rates rise a lot.  Right now we're enjoying our modestly sized mortgage at 3.5% fixed rate.

marty998

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Re: select first home with care; never move or upgrade
« Reply #13 on: September 09, 2017, 05:24:34 PM »
Seems like a perfect world scenario to me... not everyone meets their partner and can plan out their lives prior to buying their first place :)

I bought mine, which is perfect for me, but I wasn't going to hang around waiting for a decade to partner up and talk about kids and life with someone... which would necessitate a totally different type of dwelling.

Horses for courses.

boarder42

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Re: select first home with care; never move or upgrade
« Reply #14 on: September 11, 2017, 07:35:14 AM »
1. houses can be bought and sold effectively and money made in this process.  my first house we made over 100% profit on the actual money we had "invested" in it.  Our second house we upgraded to we bought at the right time and it has appreciated quite a bit from where we purchased it, selling today would net us over a 150% profit from the actual dollars we have in it. 
2. your view of mortgage interest is entirely backwards.  Reseting a mortgage assuming rates remain around where they are is a great use of debt as long as this debt is leveraged properly by investing and not used to consume more.

Most of your thoughts and comments revolve around a consumeristic mindset to home buying which is what a majority of the population approaches this as. But when approaching from the mustachian side of this equation there are alot more variables to be considered and buying and selling could make much more efficient and mathmatical sense for the Advanded Mustachian. 
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talltexan

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Re: select first home with care; never move or upgrade
« Reply #15 on: September 11, 2017, 08:13:30 AM »
Congrats on your profits, guys!

But the fact that you made them doesn't mean they were without risk. The question with putting money into real estate is...are you being compensated adequately in return for the risk you are taking?