Author Topic: Buy cheaper house in iffy area or moderate priced house in good area?  (Read 5366 times)

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Hi all, I learned some great information reading through the forums. So I wanted to ask the knowledgeable people here some advice on a dilemma I知 having. Should I buy an cheaper house in iffy part of town or moderate priced more desirable house in good part of town?

I like having my own garage, my own yard, and not sharing having walls with other houses/families I have no control over. I知 looking at buying a SFH, 1800-2200 sqft, newer built after 1990, ready to move in. The potential houses I知 looking at in the East Valley of Phoenix, specifically Mesa/Gilbert/Chandler area falls into 2 camps. I値l give 2 pretty typical examples homes for sale that fall into the differing 2 camps:

Scenario 1: smaller house in iffy neighborhood
~$200k price, $919 annual taxes, no HOA, $600/insurance
Newer 2000 home, 1767 sqft 3br/2ba, 2 car garage.
http://www.zillow.com/homedetails/950-E-9th-Ave-Mesa-AZ-85204/7629646_zpid/

Pros:
-   Much lower cost, PITA only $856/month, 3.625% 30yr fixed mortgage. Lower property taxes and no HOA fees.
-   $46k out of pocket home purchase costs. (20% $40k down, ~3% $6k closing)

Cons:
-   When I toured the house, I got impression it was the relatively nicest house in the below average neighborhood. Most other houses in neighborhood much older, not as nice looking, with shoddy cars street parked or in driveway.
-   Located in downtown Mesa with slightly above average crime rates, below average schools, average to slightly lower average income neighborhood.
-   No HOA means many neighborhood houses run down and many eyesores.

Scenario 2
: Slightly bigger house in good neighborhood
~$300k price, $2010 annual taxes, $87/mo HOA, $750/insurance
Well maintained and updated 1992 home, 2231 sqft 4br/2ba, 3 car garage.
https://www.redfin.com/AZ/Gilbert/1201-E-Sandcastle-Ct-85234/home/27942808#main

Pros:
-   Nice, very attractive updated house that fits my ideal house I can see myself living in long term. A nice house in a very good neighborhood where many houses are big lakefront homes valued at $500k-million. So opposite of scenario 1 house, now it痴 relatively below average house in above average neighborhood.
-   HOA fee includes access to big ritzy Neighborhood clubhouse with gym, tennis/racquetball/volleyball courts, 3 swimming pools etc. Clubhouse is often rented out for Weddings and Events by HOA and the event fees go into the HOA budget so event fees effectively subsidizing the HOA fees I値l pay.
-   Located in Gilbert with below average crime rates, highly ranked public schools, high end neighborhood

Cons:
-   Higher cost, PITA $1427/month after I put 20% $60k down, 3.625% 30yr fixed mortgage.
-   $69k out of pocket home purchase costs. (20% $60k down, ~3% $9k closing)
-   Bigger than I need. I知 open to renting out part of house to roommates though it might be risky since I travel frequently what happens if I get a crazy roommate that trashes the house or steals things?
-   No kids in horizon, not sure if I even want kids eventually yet so paying the higher prop taxes for the top ranked public schools are a waste.

My profile:
A little bit more about myself. I知 30 and I have been working overseas on an expat assignment for my large consulting company for the last 2 years and in 5 months, Oct 2015, my firm will be moving me back to the USA and transferring me the Phoenix office. So I知 in the early stages of house hunting.

The work experience and chance to save most of my salary while living off my Expat package has really helped me progress on my career and financial goals.

My finances:
No debt
$117k in 401k/IRA (I plan on doing a backdoor ROTH IRA for 3 years $16.5k non-deductible IRA contributions early next year)
   Invested in 90/10 equities/bonds (100% Vanguard Target Retirement 2050 Trust Plus)
$105k in after tax brokerage invested 80/20 in equities/bonds
$40k 33% stake (joint investor with parents) on an investment rental condo in Tempe, AZ a mile from ASU.
$10k liquid money in checkings/brokerage cash
$2.5k gold in my parent痴 safe (2x 1 ounce bullion)

Salary of $135k/yr, target bonus of 8-12%. Average $150k last 2 years.
Due to my Expat assignment I get tax equalization benefits (I知 taxed/subsidized at the USA Arizona rates) and my employer has been paying for my foreign housing.
Currently with my lower Expat expenses, I知 able to save on annual basis:
-   $27k 401k (18k with 50% employer match)
-   $70k year after tax ($6k/month)
-   $3.35k HSA contribution

After I buy the house, my annual after tax savings would be reduced by my new house expenses, so lessor savings rate of $60k ($70k - $10k) or $53k ($70k - $17k) based on whether I buy the $200k or $300k house.


Bonus question:
Now that my parents have saved up more money, they are giving me the option of them buying me out of my 33% stake in the Tempe investment condo for 1/3 the current market value. Below are the stats. It doesn稚 quite meet the 1% rule. Looking net profit of 5.5% ($7.2/$130k), should I let my parents buy me out and I reallocate this money to my equities or my own future house down payment?

Investment Condo Stats:
755 sqft, 2br/1ba condo
Market Value: $128k-$133k based on Zillow and Comps
Original Purchase price: $120k June 2014
Original Mortgage Amount: (Paid Cash)
Gross Rents: $1000/mo
Principal and Interest (the P&I of your PITI - should match with the above info): $0
Taxes and Insurance (the T&I of your PITI): $920/yr prop tax
HOA costs: $220
Deferred maintenance notes: 1%, $1200/yr
Net profit after expenses of $400/month is $600/mon

OneCoolCat

  • Bristles
  • ***
  • Posts: 438
  • Age: 32
  • Location: SoFla
TLDR, but commenting off the title alone.

Housing prices in good areas tend to go up quicker than those in iffy areas.  That would be an incentive to me.

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
So even though I won't be taking advantage of the good public schools in the area, the housing in good areas has better chance for appreciation?

Looking at the Zillow charts, I see the $300k house was valued at a peak of $375k during the housing bubble era of 2006, then slumped to a low of $200k in 2011 before bouncing back to it's current $300k value.

In contrast, the $200k house peaked at $275k in 2006, slumped to $150k in 2011 and per the zillow valuation, is still stuck at zillow $175k value now.

So I see what you mean. The $300k house appreciated $100k/50% from lows last 4 years while the $200k house only got $25k/16.6% bounce from lows.

I used the NYT rent buy calculator and assuming I stay put in the house for 10 years, the potential housing appreciate is a nice icing while living in a good house in a good neighborhood.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1821
  • Mustachian-ish in Live Music Capital of the World
It depends on your goals. 

Against:  Why buy more house than you need?  You have a great savings rate without buying a home; why not keep doing what you're already doing and end up like http://www.gocurrycracker.com/  in 3 to 5 years?

Pro:  You sound like you envision a more expensive looking lifestyle and are comfortable continuing to work.  You might work 10 to 15 years instead of 5 that way, though. 

Financially, I doubt that housing appreciation is enough to compensate for the extra cost in the sense that you will get back the extra money invested.  You will pay more, and get more "niceness" - you will probably not get more hours of sleep, better food, etc.  So it's a judgment call:  Do you want the personal pleasure you derive from living in a house?  Do you want the nicer house?  Are you personally willing to work longer in exchange?

The "niceness" you're getting per dollar appears to be very good from an outsider's view if you want something of that type.  I think you will buy it and be glad.  Anyway, good luck.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1821
  • Mustachian-ish in Live Music Capital of the World
PS.  Yes, sell the condo if you're going to buy the house.  It's not a great rental; the new property will keep you inflation hedged; stocks have better long term returns. 

That said, it's not a terrible rental either, the right person might be ok sticking with it because their situation is different.  I assume your parents are in that category.  Obviously be fair to your family since you are prospering.  Sounds like you are already have the family issues in good shape.  Keep up the fine work!

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
To be honest, I enjoy the nicer consumer things in life. Travel hacking/redeeming my accrued miles and hotel points for exclusively premium cabin and upscale hotels, eating at nicer restaurants (on expense account), and owning nice cars through either manufacture subsided low cost car leases or 4-6 year old depreciated and in still good condition luxury cars. As long as I'm still saving the large part of my income of course.

I enjoy my current career most of the time despite the occasional bout of stress and craziness. And once I get burned out either with the travel or extra hours, I'll transition to a less exhausting and moderately lower paying industry job.

About the GoCurryCracker route, I considered it. I did a 8 month sabbatical in 2009 when I was in between jobs. I discovered after a few months of lazing around, I was bored stiff. Plus on the weekdays when all my friends and family was busy working, there wasn't that much I could do and I couldn't travel 100% of the time by myself. I will reassess when I eventually meet a good life partner and especially if I decide I want kid(s).

It's nice to add some structure to my life with work as long as I can still use my accrued 25 days a year PTO and the occasional unpaid leave time for rejuvenating short sabbaticals. So I don't mind working full time for say another 15 years until I'm 45 with a nice nest egg, then scaling it back to working part time.

One of my big fears is of jumping into the housing market after it's already made such good gains. Similar to my previous fear of being being heavily invested in very bullish equities and bonds. But I shouldn't try to time the market.

I need an place to live when I transfer to Phoenix and an midsize upscale SFH in the decent area leases for $1300-$1500. If I'm going to pay that in lease payments, it makes sense to me to buy the $200k range house since I'm planning on owning for the long term and using this as an diversification and inflation hedge as you noted.

I need to figure out if the $550 monthly upgrade cost to the nicer $300k house is worth the payoff satisfaction of nicer neighborhood, less fear of crime, and of course prettier things. Any potential appreciation later down the road is icing on the cake, I expect my equity positions to do the heavy lifting of investment returns.
« Last Edit: May 03, 2015, 05:47:30 PM by Rockstopper03 »

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
PS.  Yes, sell the condo if you're going to buy the house.  It's not a great rental; the new property will keep you inflation hedged; stocks have better long term returns. 

That said, it's not a terrible rental either, the right person might be ok sticking with it because their situation is different.  I assume your parents are in that category.  Obviously be fair to your family since you are prospering.  Sounds like you are already have the family issues in good shape.  Keep up the fine work!

Thanks for the encouragement! I made many mistakes in my early 20s and have really just started hunkering down in the last 3-4 years. Better late than never!

My parent's got badly burned by the dotcom crash since they were overweight in tech stocks and since then they have been very gunshy about investing heavily in equities.

My parents own 3 investment condos in Tempe close to ASU, all 2br units renting to students, and they are planning to use the rentals to supplement their Social Security and 401k when they retire in 7-9 years around age 65-67. My dad enjoys working full time at his engineering job and my mom after selling the family restaurant 7 years ago is stay at home and working part time PM'ing the rentals.

Being a long distance landlord is a pain so they're focused on rentals in the PHX area. With the 33-50% bounce back in housing the last 4-5 years and all the other competing investors and new home buyers, it's hard to find the ideal 1% much less 2% rentals.

I'll definitely sound my parents out. If it doesn't cause them any financial hardship, I will likely cash out the ~$40k from my share of the rental condo and apply it towards my down payment.
« Last Edit: May 03, 2015, 06:04:44 PM by Rockstopper03 »

Argyle

  • Pencil Stache
  • ****
  • Posts: 909
Go for a more expensive house in a nicer neighborhood, but avoid HOAs.  That's my advice.  You don't need/want all that ritzy clubhouse stuff (and you can't count on it subsidzing your fees forever).  But the standard advice is always to buy the small house in a neighborhood of pricier houses, not the expensive house in a neighborhood of cheap houses.  The first will have much better resale value than the second.  Also, there's a chance the sketchy neighborhood could become sketchier not good at all.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
I own rentals in Mesa, Tempe and Gilbert.  I would NOT buy the first house because of the schools.  Those schools will keep a lot of buyers from buying there.  Your upside potential is significantly reduced because of that.

However, buying a much bigger $300k house in Val Vista Lakes is not your only alternative.  Where is your job located?  Will you be traveling frequently and need to get to Sky Harbor?  I would look at 1,500 to 1,700 square foot houses near to my place of employment.  Or buy your parents out of the condo and move into it until you figure out what you want.

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
The Phoenix office is in North Phoenix on camelback road. However, I will rarely need to go in the office. Maybe once a month if I need IT support for my computer or for work social events. It's funny, there is not enough desk space at any of our regional offices if all our consultants came back to their home base office. If I need to work out of our office say to use a conference room or because I can't or don't want to work from home, I would need to reserve an available cubicle.

I'll be traveling quite a bit, 50-75% travel and then working from home the rest of time.

Much of my friends live in the East Valley along with my family and it would be nice to live close by. I'm primarily looking along the us60 corridor between 101 and 202 Santan freeway so it's a medium 20-30min drive to airport and close by family and friends.

Unfortunately much of the housing in those areas are older stock and I prefer the more modern style and layout of housing. And of course newer housing are more energy efficient during the hot summers and hopefully require less immediate maintenance.

My parents condos are all student tenants occupied though space might free up for the fall or winter semester. it might be refreshing to live for a short while close by ASU student housing with easy access to the nightlife and scenery ;).

I'll be flying back to Phoenix next week and looking with a realtor at some of those houses in the 200-300 range. The 300k house would be the top range and I agree overkill for my needs though very fancy pants.

I'm pre-qualified for a penfed mortgage and if I do decide to buy, penfed offers an attractive waived 1% origination fee and penfed pays closing costs up to $10k 15/15 3% ARM.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
There are pockets of newer housing in Tempe.  Check out Oasis at Anozira (Eliot at McClintock).  Mid 1990's, quality builders.  There are a couple of pockets in zip 85284 near Priest and Ray (Sierra Tempe and a Shea subdivision) from the same era.  There is a small subdivision of smaller Haciendas near Guadalupe and Kyrene.  Buying in one of those areas will cut 20-30 minutes off the commute to Camelback each way from Val Vista Lakes.  You can get to the airport in 20 minutes.  Try driving to Sky Harbor from Val Vista Lakes for a 7 AM flight.

Your problem now is you are competing with full employment in the tech areas.  Anything along the 202 corridor in Chandler and Gilbert is going to be pricey and sell immediately.  The commute, even if it is rare, will be horrendous.  In your shoes, I would buy closer in, because of future rental potential and the easier commute.  And when tech cycle goes into the inevitable downturn, you will be in a stronger rental and resale market.  If you decide to have a family, keep the house in Tempe as a rental.


Pigeon

  • Handlebar Stache
  • *****
  • Posts: 1207
I would go for the better area, for sure.  I would probably look for something a little smaller though, as 4br is overkill for you.  If you can find a home in a good area without a HOA, that's what I'd shoot for.  HOAs aren't that common where I  live, but some places it's hard to avoid them in any type of newish construction. 

Rockstopper03

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Yeah, I been looking through the MLS... unfortunately nicer areas all have HOAs, from low of ~$45/month to for some SFHs in Golf Courses $250/month just HOA fee!

Ok, sounds like buying home in nicer area is the way to go. Thanks for all the input.

Looking through MLS listing, I've found a few smaller 1800-2000sqft houses in the $270-290 range I'll look at when I tour houses with the realtor next week.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
If you must be in the newer East Valley suburbs, here's an example of a brand new listing for $180k.  It's been owned by the same couple for 16 years.  It's immaculate, updated and well maintained.  A yard and enough space for a single person, a couple, or a couple with a baby.  Not too much space for someone that's on the road all the time.  About three miles from the 202, four miles from 60.  Or just drive Warner to the 101.  Easily rentable (but not meeting the 1 percent rule) when you want to move up.  It will sell in a day or two. 

http://www.realtor.com/realestateandhomes-detail/645-E-Devon-Dr_Gilbert_AZ_85296_M19711-81956?row=1

SnackDog

  • Handlebar Stache
  • *****
  • Posts: 1284
  • Location: Latin America
You are leveraged!  Buy the most you can afford in the best location you can manage.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Buying a lot of house in a highly cyclical market (Phoenix) during an up swing that is boosted by tech employment and artificially low interest rates is not a sensible idea in my view.  Buy something that meets your needs now, is easily affordable, and will appeal to a large number of renters if you get transferred overseas again.  That makes a lot more sense.   If you get married and start popping out the kids, then move.  That's when you will need the larger, more showy property with the clubhouse and you will have a rental that's an easy keeper.  In the meantime, invest the difference. 

Bob W

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 60
  • Location: Missouri
  • Live on minimum wage, earn on maximum
IMHO you are in a perfect situation to be a renter.   I don't get the whole I like a garage and no shared walls deal.   You can easily rent a house with a garage and yard or even a townhome.   

If it were me, I'd be going the townhome rental route.     

Remember -  You don't own houses --- they own you.