Author Topic: Probably need a punch in the face - house purchase  (Read 8513 times)

bigchrisb

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Probably need a punch in the face - house purchase
« on: May 18, 2014, 09:44:51 PM »
I probably need a bit of a face punch.  I'm eager to hear your opinions on this one.

I'm thinking about buying a house.  And its probably in the ballpark of $750k.  Tell me if I'm being stupid.

Background:
I'm 32, live in Australia, net worth approx $1.25m. Gross income approx $270k, net approx $208k.  Expenses ~50k/year (83k if including investment debt).  I currently rent, and of this I spend ~$17k in rent.  I have one housemate which drops my share of this - I would take a housemate, possibly two, in the new place too, and I reckon I could recover a higher rate than currently).  I'd like a nicer house, located closer to work (currently 12km).  I'm also in a building relationship, and I marriage/kids are probably coming in the medium term.  At this stage I'm leaving my partners finances out of this (she has income approx $100k, has a 2br apartment she lives in, with a mortgage remaining on it.  In short, she is in a reasonable financial position, but lower income, lower savings rate and lower net worth than me).

So, I've been looking for a few months, and found a place I'm seriously considering buying.  It will be in the ballpark of $750k. 

Real estate prices here are ridiculous (median price a bit over $500k, ~8 times median income, rental yields (after cost) 2-3%), and I've been saying to myself that its been a bubble for over a decade.  Prices in my city have stagnated in the last 4 years, and are now falling a little.  I still "feel" that they are overvalued, however I also feel I can afford a nicer place.  I'm a bit caught by the relative vs absolute issues.  Paying $750,000 (more than 10 times median income here) for a house is in the hair is on fire area.  Paying 3 years gross earnings for a single person, and about 60% of net worth seems less so?

My rationale for buying is:
- Get closer to work
- Not pay tax on the $17k/year I currently pay in rent
- Have a nicer place and stop living like a student
- Have a more comfortable place (that I'm prepared to do the work on to make thermally efficient)
- Settle somewhere I'm prepared to stay for a couple of decades.
- My intent is to buy it and let it out for a year first, so I can claim the stamp duty and transaction costs as a tax deduction.  This would be about a $15k tax saving.  Spending $750k to save $15 is a bit of a false economy, I know...

What do you think?  Am I in need of a bucket of cold water to extinguish my burning hair?  Or can I justify this to myself?

MDM

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Re: Probably need a punch in the face - house purchase
« Reply #1 on: May 18, 2014, 10:04:40 PM »
If your relationship is as serious as the word "partner" implies, then it ought to be a joint decision and not one you make on your own - or you run the risk of being on your own.

As for the merits of the purchase, tying of 60% of your net worth in a bubblish asset seems...unwise.

But you are closer to the situation, so it is really your (and your partner's(?)) call - good luck!

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #2 on: May 18, 2014, 10:17:37 PM »
Good point re the partner - she ans I have discussed it at length, and she is supportive.  Probably more supportive than I am, as she places a higher emphasis on housing (I'm living in effectively a student share house still).

She will continue to own her place, and the idea is that at some stage we will live together, probably in the place I'm buying. 

That said, we keep separate finances, and don't currently live together.

Tad

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Re: Probably need a punch in the face - house purchase
« Reply #3 on: May 19, 2014, 12:04:31 AM »
I think it depends how eager you are to stop working.  If you enjoy your job and are happy keeping at it for a few extra years, then moving into a house you and your partner are excited about seems like a good idea.  With that level of income, you can easily afford it and still be on track to early retirement.  On the other hand, if you are focused on quitting work ASAP, then you might want to hold off, as this is money you are choosing to spend, not money you must spend.

deborah

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Re: Probably need a punch in the face - house purchase
« Reply #4 on: May 19, 2014, 12:09:57 AM »
I thought only Canberra house prices had stagnated - and if you are thinking of buying in Canberra now, you probably do need a face punch. But, looking at the ABS, Brisbane, Hobart and Adelaide have also stagnated, although Brisbane and Adelaide have gone down and are currently coming up.

I am not completely up on capital gains tax, but I thought that if you rented out a place before making it your principal residence, you have to pay 1/x (where x is the number of years you live there) capital gains tax. If you reside and then rent out, you don't have to pay capital gains if you rent out for less than 5? years. There goes your tax advantage of renting first!

Secondly, you are taking risks by renting - these may be minimal, but there are some poor tenants out there, and you are more likely to get them in your first rental than later on when you have had more experience.

Obviously, when you move to more luxurious accommodation, you may find your utilities bills going up astronomically. Check out the energy rating (everywhere I know of insists on houses being sold having ratings - so they should be easy to get), and put in some figures to calculate the bills expected, and ask if the bills are available (they may not supply them, but it doesn't hurt to ask). See how that changes your current expenditures - you may not save what you think.

You can buy it without a mortgage but it may put back FI by 5 years (you are saving about $150k a year - $750k/$150k = 5 years). Is that OK?

The other thing to consider is spending creep. You will have a nice house, and no or crud furniture. How much will you need to spend to have furniture that "looks right"? The list goes on...

Christof

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Re: Probably need a punch in the face - house purchase
« Reply #5 on: May 19, 2014, 12:16:49 AM »
What are your annual costs for this house compared to a cheaper one or an apartment? I guess a higher price will also mean higher taxes? Is the house relatively large, too? Then you will have extra costs for heating/cooling, illumination, maintenance. What are the closing costs in Australia? In Germany in my state they are approximately 10% now, meaning that we are more likely buy for future needs.

The one recommendation I have is to think very hard about "Have a nicer place and stop living like a student". Nice is something you get used to very quickly. Stepping down is psychologically much harder than stepping up.

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #6 on: May 19, 2014, 12:50:53 AM »
Good points. 

1. "I think it depends how eager you are to stop working".   My income from investments (approx 60k/year) covers my current lifestyle.  Irrespective of that, I'm not prepared to stop working yet - I think I'd go crazy if I did. Good point.

2. Yes, its in Canberra.  The market here appears to be tanking.  My job here is secure for at least 2 years (part of a buyout agreement).  I figure the old "buy when there is blood in the streets" probably applies to Canberra right now!  Sounds like you have a different view?

3.  The idea with tax is to rent it out for a year, so I can claim a deduction on the closing costs (approx $35k), depreciation for a year, and interest costs for a year.  My marginal tax rate in the next two years will be rather high due to realizing gains from the sale of a business. Once I move in to it, I can get a valuation done, and use that to re-set the capital gains exemption for a primary place of residence, and claim the exemption if rented for up to 5 years.

4.  Renting risks - perhaps I'm under estimating these.  I'd hate for the place to get trashed before I moved into it?

5. The utilities bother me.  I took an IR camera with me to one of the inspections, the house leaks and is generally poorly insulated.  I'd figured I was up for about $35k when I move in on draft proofing, insulation on floor, walls and ceiling, and replacing the windows with double glazed.  Solar access is good though.  Plus side is it has a solar system on the feed in tariff with 17 years left on contract, so there is about $1100/year in utilities offsets from that.  The current gas bill is a shocker at about $2k/year.

6. Spending creep.  I suspect this is going to be a problem, and one of the compromises I'm going to have to make to keep a relationship happy.  e.g. my couches are $150 of gumtree, hers are $3k bought new...  In some ways this whole house is spending creep

7. Taxes.  Yes, taxes (rates) are levied on the value of the land here.  These will be a significant change in costs for me of something like $2.5k / year.  Land taxes if rented are higher again.  Smaller house would equal less taxes.  Good point.

8. Closing costs here all up work out at about 4% at purchase, and another 3% at sale, so each time you move you lose about 7%. Means not moving is a good idea!

Thanks for the feedback, and keep it coming!


urbanista

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Re: Probably need a punch in the face - house purchase
« Reply #7 on: May 19, 2014, 01:04:03 AM »
We were renting a perfectly nice 3bed unit in Melbourne for 18K a year. Then we bought a house for 610K + stamp duty. That was 4 years ago. Since then we consistently spent at least 6K a year on general upkeep/cosmetic changes. Add this into your calculations: around 1% of the house value will generally go to maintenance and small renos like new paint/carpets. Financially, it was a bad move. The commute increased as well. Also, we had buyers remorse and don't like this house as much as we liked it when purchased.

I believe that buying a house in Australia is a good idea only from a sentimental point of view. The place to raise a family and feel like home. Rental property not always provide that. But it is almost always a bad financial decision (provided the money to be used for the purchase are invested in the sharemarket).

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Re: Probably need a punch in the face - house purchase
« Reply #8 on: May 19, 2014, 01:35:19 AM »
One of the things which led me to take up the early retirement option was that I owned the house I live in, mortgage free.  Without that feeling of security, and the fact that it reduced the future need to find a considerable amount of secure ongoing income for rent or mortgage, I suspect I would have just kept working.  I don't get that for you early retirement is your principle focus, and it doesn't have to be (you express no unhappiness with your work, and don't say you have other plans for your life  - which is fine, mustachianism is about making conscious choices, not about having to follow a set pattern).

If you buy a house, it is unlikely to be a quick flip but something to hold on to for the medium/long term, particularly if you are in a declining market.  (I'm not too bothered about the declining market on the whole, though, as I treat investing in houses the same as investing in the stock market: buy and hold and don't try to time it in and out.  Just use a declining market as an opportunity to take you time finding what you really want, and to negotiate hard.)  The big question for you is: are you planning to stay in your current city long-term?

As to the house you buy, my preference is always to go for 1) a great (for you) location and size of plot - you can change everything about a house except this, 2) small (keeps on-going costs to a minimum, and reduces the need to buy furniture to store in rooms you don't use) and 3) in need of work (doing work yourself means you get what you want and know how well it has been done).

I can't say too much about buying small, even if you are planning a family.  A family in a small house spends time together in the same rooms, whereas a family in a big house splits off into different rooms - in which case, what is the point?  Particularly now that everyone ends up with their own electronic gadgets, put that together with big houses and some families are almost completely atomised and hardly see each other as a group.

deborah

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Re: Probably need a punch in the face - house purchase
« Reply #9 on: May 19, 2014, 02:01:09 AM »
Good points. 

1. "I think it depends how eager you are to stop working".   My income from investments (approx 60k/year) covers my current lifestyle.  Irrespective of that, I'm not prepared to stop working yet - I think I'd go crazy if I did. Good point.

2. Yes, its in Canberra.  The market here appears to be tanking.  My job here is secure for at least 2 years (part of a buyout agreement).  I figure the old "buy when there is blood in the streets" probably applies to Canberra right now!  Sounds like you have a different view? Look at what the Canberra housing market did after the 1996 budget (it wasn't pretty) - and this one was worse from an ACT perspective. I'm not sure there's blood in the streets yet. Over the last few years there has been a decline in public servants, and small businesses have been hanging in there by the skin of their teeth - this has caused the current stagnation. One of the reasons that Canberra prices are high is that many are owned by Sydney people as rentals because Sydney is so expensive If those people also pull out...

3.  The idea with tax is to rent it out for a year, so I can claim a deduction on the closing costs (approx $35k), depreciation for a year, and interest costs for a year.  My marginal tax rate in the next two years will be rather high due to realizing gains from the sale of a business. Once I move in to it, I can get a valuation done, and use that to re-set the capital gains exemption for a primary place of residence, and claim the exemption if rented for up to 5 years. Sounds like good reasoning

4.  Renting risks - perhaps I'm under estimating these.  I'd hate for the place to get trashed before I moved into it? I'd say it's unlikely at the price you're planning on, and thinking of the areas it could be in

5. The utilities bother me.  I took an IR camera with me to one of the inspections, the house leaks and is generally poorly insulated.  I'd figured I was up for about $35k when I move in on draft proofing, insulation on floor, walls and ceiling, and replacing the windows with double glazed.  Solar access is good though.  Plus side is it has a solar system on the feed in tariff with 17 years left on contract, so there is about $1100/year in utilities offsets from that.  The current gas bill is a shocker at about $2k/year. What's the EER? You'll get a report which will include the cheapest ways to increase the EER. I presume it has gas central heating - which can be much cheaper when properly managed - sounds like they had it on all the time!

6. Spending creep.  I suspect this is going to be a problem, and one of the compromises I'm going to have to make to keep a relationship happy.  e.g. my couches are $150 of gumtree, hers are $3k bought new...  In some ways this whole house is spending creep

7. Taxes.  Yes, taxes (rates) are levied on the value of the land here.  These will be a significant change in costs for me of something like $2.5k / year.  Land taxes if rented are higher again.  Smaller house would equal less taxes.  Good point.

8. Closing costs here all up work out at about 4% at purchase, and another 3% at sale, so each time you move you lose about 7%. Means not moving is a good idea!

Thanks for the feedback, and keep it coming!

deborah

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Re: Probably need a punch in the face - house purchase
« Reply #10 on: May 19, 2014, 02:31:43 AM »
I've just been talking to my partner about this, and he thinks the Canberra market is about at the bottom. So two different opinions in one house - check the figures and decide for yourself!

agent_clone

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Re: Probably need a punch in the face - house purchase
« Reply #11 on: May 19, 2014, 02:47:24 AM »
If you haven't already you should get the building and pest report from the real estate agent.  These are required prior to putting a house on the market for sale in Canberra and the agent should have this.  This will include the EER rating (which is what deborah is asking for), and include the inspectors notes on whether the house has four walls and a door (and perhaps whether the inspector found some other noticeable issues...).

I was reading somewhere that some people expect houses in the inner areas (e.g. around town centres) will probably retain their values, however those in the outer areas (e.g. Banks, Theodore, Macgregor, Dunlop, etc) will lessen in value.  Certainly according to my mother houses in the outer areas such as Banks were extremely difficult to sell in 1996.

People I've been talking to think that in about 6 - 12 months it may be a good time to start looking.  If you are planning on living there for the next 30 years it won't matter anyway.
« Last Edit: May 19, 2014, 05:10:31 AM by agent_clone »

marty998

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Re: Probably need a punch in the face - house purchase
« Reply #12 on: May 19, 2014, 04:21:00 AM »
Stamp duty is not tax deductible. It forms part of the CGT cost base of the property. However didn't the ACT government abolish stamp duty in favour of a broad based land tax?

Regardless, the point remains, the Tax man will be all over your arse if you try and claim stamp duty.

Same with legal/conveyancing fees. Mortgage/bank costs* are deductible over 5 years (black hole expenditure).

Any repairs you do to the property to get it into a rentable state will also be treated as "initial repairs" and are capital in nature (i.e. added to your cost base).

*Loan application fees, mortgage registration, fee for bank staff attending settlement etc
« Last Edit: May 19, 2014, 04:24:19 AM by marty998 »

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #13 on: May 19, 2014, 04:56:15 AM »
Apparently the act is the only state where it is deducible, or so tells my accountant?

agent_clone

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Re: Probably need a punch in the face - house purchase
« Reply #14 on: May 19, 2014, 05:07:42 AM »
Marty in the ACT if you rent your property out just after purchase it is tax deductible as technically your leasing the land from the crown, rather than actually buying the land.  The amount of stamp duty is reducing over time however it has not yet been abolished.  They are phasing it out over 20 years.

Oh yeah bigchrisb in regards to tax deductibility etc, you may also consider renting the place for 2 years rather than 1 and make improvements that won't disrupt your tenants too much, these would then be tax deductible (pending the agreement of the tenants).  My understanding is that their not deductible in the first year, but are in the second.

marty998

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Re: Probably need a punch in the face - house purchase
« Reply #15 on: May 19, 2014, 05:11:01 AM »
I stand corrected. A cursory search of the interwebs shows that all land in the ACT is leasehold not freehold and because of this the Duty is deductible.

The rule also applies to all properties in the Northern Territory.

Learn something new every day!

marty998

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Re: Probably need a punch in the face - house purchase
« Reply #16 on: May 19, 2014, 05:12:21 AM »
thanks AC yes didn't see your post. Good to see I came to the same understanding as you independently!

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #17 on: May 19, 2014, 05:40:11 AM »
Re the EER, its currently 2.5 stars.  Insulating under the floor and the walls (about 60% of the walls are the original brick vaneer with no insulation, 40% is a 2008 extention with insulation) takes it up to 4.5 stars.  Do the windows to a decent thermally broken double glaze and 5.5

tmac

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Re: Probably need a punch in the face - house purchase
« Reply #18 on: May 19, 2014, 06:57:17 AM »
If this has already been asked, my apologies.

Is this house a suitable size for two people, or two people with potentially one or two kids? I have this in mind because a friend (in a family of three) has just purchased a house with six bedrooms. WAY too big, and they spent way too much. Is this home you're considering suitably sized for two to four people, without a lot of wasted space?

skunkfunk

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Re: Probably need a punch in the face - house purchase
« Reply #19 on: May 19, 2014, 07:36:24 AM »
Will you want to stay there when you FIRE? Sounds like you're pretty close to FI.

happy

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Re: Probably need a punch in the face - house purchase
« Reply #20 on: May 19, 2014, 07:42:08 AM »
At first glance its seems quite a lot for a house in Canberra, which would not be my first choice for real estate purchasing. Is Canberra going to be your home long term? If yes, then as someone else has said try to optimise for the market which might be something in the more central suburbs: which probably does take you into that price range. Spend on the location and not as much on the house. As someone who has overbought size wise, don't get carried away and make it too big, it will just eat $$$, even with housemates.

If you are into minimising utilities as well as insulation/DG windows etc, consider the aspect of the house/land. The optimal is a north facing house, with the land dropping away( or at least near level) to the north. Look at the nearby landform with regard to shading. This will save heaps on heating/ cooling.  Secondly if the house/ garage are at the highest point, then tank water ( and grey water if you wish) can drain onto the garden by gravity feed in those dry Canberra summers.

Have you thought about a smaller unit/townhouse which you could keep and rent later on when you start a family and expand? I'm not sure how strong the rental market is, so I don't know the figures.




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Re: Probably need a punch in the face - house purchase
« Reply #21 on: May 19, 2014, 02:33:07 PM »
The moving in in a few years, probably into the house I buy, is a red flag to me.

Unless I had a reasonably solid expectation of staying in one spot for a decade or more, I would keep renting. Maybe a nicer rental, but a rental nonetheless. Otherwise all of the transaction costs eat you alive.

The wording of your post doesn't scream "I am settling down".

deborah

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Re: Probably need a punch in the face - house purchase
« Reply #22 on: May 19, 2014, 03:08:13 PM »
It seems to me that this house is a fundamental excuse to turn your head away from mustashianism, and to take up the spendy lifestyle. You probably need to think about what your values are, and whether you want to head in this direction.

Let us look at an example of the house you might be buying http://www.allhomes.com.au/ah/act/sale-residential/30-french-street-hackett-canberra/1316902211311 - centrally located, recently updated... It has an enormous number of rooms to heat and furnish. This will change your lifestyle and you will need to redo your FI figures to see when you could retire.

I happen to really like Canberra, but most people want to get away from it as soon as they retire. Do you really like Canberra?


msilenus

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Re: Probably need a punch in the face - house purchase
« Reply #23 on: May 19, 2014, 03:26:27 PM »
You say marriage and kids are probably in the medium-term future, but didn't mention the schools.

Transaction costs in the U.S. on RE are about 6%.  I don't know about Australia. If it's at all similar, then, IMO, you have to basically plan your life around minimizing RE transactions.  They're just that expensive.  So if that's the case, and if you aren't both certain you'll be happy with the school district, then you should pass and go back to the drawing board.

deborah

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Re: Probably need a punch in the face - house purchase
« Reply #24 on: May 19, 2014, 03:36:21 PM »
You say marriage and kids are probably in the medium-term future, but didn't mention the schools.

Transaction costs in the U.S. on RE are about 6%.  I don't know about Australia. If it's at all similar, then, IMO, you have to basically plan your life around minimizing RE transactions.  They're just that expensive.  So if that's the case, and if you aren't both certain you'll be happy with the school district, then you should pass and go back to the drawing board.
Things are a bit different in Australia. There really aren't such things as school districts (although some schools have feeder areas). Each state funds all of the government schools in its state. The ACT government has a really good system.

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #25 on: May 19, 2014, 05:05:42 PM »
It seems to me that this house is a fundamental excuse to turn your head away from mustashianism, and to take up the spendy lifestyle. You probably need to think about what your values are, and whether you want to head in this direction.

Let us look at an example of the house you might be buying http://www.allhomes.com.au/ah/act/sale-residential/30-french-street-hackett-canberra/1316902211311 - centrally located, recently updated... It has an enormous number of rooms to heat and furnish. This will change your lifestyle and you will need to redo your FI figures to see when you could retire.

I happen to really like Canberra, but most people want to get away from it as soon as they retire. Do you really like Canberra?

Born and bred here.  Partner's job is rather fixed here (mine is much more portable).  I envisage spending a few years overseas, but Canberra being my long term base. Yes, I'm looking in the core suburbs.  As I can see a few years living overseas at times, I want something that is easily rentable, while having the space (think shed space) for the things I value.  The man shed space sadly rules out a lot of the apartments and most townhouses.  I've looked at a couple of townhouses that are at the end of blocks, which could be viable, but then I read the body corporate minutes and get rather dissuaded by body corporates!

bigchrisb

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Re: Probably need a punch in the face - house purchase
« Reply #26 on: May 19, 2014, 05:09:14 PM »
You say marriage and kids are probably in the medium-term future, but didn't mention the schools.

Transaction costs in the U.S. on RE are about 6%.  I don't know about Australia. If it's at all similar, then, IMO, you have to basically plan your life around minimizing RE transactions.  They're just that expensive.  So if that's the case, and if you aren't both certain you'll be happy with the school district, then you should pass and go back to the drawing board.

Schools are important, no doubt.  However, the public school system here is pretty good in general, and the areas I'm looking in have schools I'm comfortable with.  If they will still be so in the ~10 years when I have kids in them, who knows!

momo5

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Re: Probably need a punch in the face - house purchase
« Reply #27 on: May 19, 2014, 08:21:05 PM »
dont make the mistake I did, and buy more house than you need. bigger house means higher utilities, more maintenance (ie, when our roof needed replacing, it was a big roof = big bill), more house to clean, more house to furnish. even if you do furnish on the 'cheap' you need more stuff to fill the space. more carpets. more light fixtures. more paint. pretty much, more everything. we have filled our house with kids and in that aspect its nice to have some elbow room, but really, we could manage with less space. our home is nearly paid for but I often regret buying it. we could have saved a bundle and by now it would have grown to some real significant stache.


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Re: Probably need a punch in the face - house purchase
« Reply #28 on: May 19, 2014, 08:25:10 PM »
dont make the mistake I did, and buy more house than you need. bigger house means higher utilities, more maintenance (ie, when our roof needed replacing, it was a big roof = big bill), more house to clean, more house to furnish. even if you do furnish on the 'cheap' you need more stuff to fill the space. more carpets. more light fixtures. more paint. pretty much, more everything. we have filled our house with kids and in that aspect its nice to have some elbow room, but really, we could manage with less space. our home is nearly paid for but I often regret buying it. we could have saved a bundle and by now it would have grown to some real significant stache.

Yup, buy small, enjoy the benefits. We've never regretted keeping a smaller home, although it's not tiny by any means.